The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this
market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the InterBank Market.
Banks borrow in this money market for the following purpose:
• To fill the gaps or temporary mismatches in funds
• To meet the CRR & SLR mandatory requirements as stipulated by the Central bank
• To meet sudden demand for funds arising out of large outflows.
Thus call money usually serves the role of equilibrating the short-term liquidity position of banks
Call Money Market Participants :
1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs
2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.
Reserve Bank of India has framed a time schedule to phase out the second category out of Call Money Market and make Call Money market as exclusive market for Bank/s & PD/s.
The most active segment of the money market has been the call money market, where the day to day imbalances in the funds position of scheduled commercial banks are eased out. The call notice money market has graduated into a broad and vibrant institution .
Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money".
When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.
The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are
allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken steps to make the call/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed access to this market beyond December 31, 2000.
From May 1, 1989, the interest rates in the call and the notice money market are market determined. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1 - 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day variations are also not uncommon. Hence there is
a high degree of interest rate risk for participants. In view of the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. This will facilitate quick and timely debit and credit operations. The call market enables the banks and institutions to even out their day to day deficits and surpluses of
money. Banks especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR).
The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis.
The overnight call money or the inter-bank money market rate is presumably the most closely watched variable in day-to-day conduct of monetary operations and often serves as an operating target for policy purposes. The choice of operating tactics
from quantity to rate based targeting, following the IS/LM based analysis of Poole (1970), has been largely accepted in favour of interest rate targeting, because of the diminished link between monetary aggregates and economic objectives of monetary
policy as a result of the fast pace of financial innovations. Most central banks, therefore, presently use indirect instruments in an attempt to maintain the short term interest rate at a desirable level with the use of appropriate liquidity management practices. The most common of these instruments of liquidity management is the central banks’ repo facility which enables modulation of the marginal liquidity on a day to day basis so as to ensure stable conditions in the money market and, particularly, to maintain the short term money market rate as close as possible to the official/policy rate. Changes in the short-term policy rate made by central banks provide signals to markets, and various segments of the financial system, therefore, respond by adjusting interest rates/returns depending on their sensitivity and the efficacy of the transmission mechanism. Economic implications for investment and spending decisions of producers and households follow as usual,
thereby affecting the working of the real sector viz., changing aggregate demand and supply, and eventually inflation and growth in the economy. It is, therefore, clear that the interest rate stance of a central bank and its implications for economic activity and inflation play an important role in the conduct of monetary policy.
The objective of the paper is, therefore, to assess the volatility pattern of the call money rate in India during the last three years and to estimate its sensitivity vis-à-vis the Reserve Bank of India’s liquidity adjustment facility (LAF) auction decisions for the purpose of eliciting underlying market characteristics. Attempt is made to provide evidence, albeit indirectly, on how
regulatory changes related to other instruments in the money market may have affected the functioning of the interbank call money market. Finally, some evidence is also offered on the link between money market volatility and interest sensitive
financial markets, particularly the government securities market.
The remainder of the paper is structured as follows. Section I provides an overview of liquidity management in India while cross-country experience is set out in Section II. Data used in the analysis are explained in Section III. Methodology used and the empirical analysis are presented in Section IV and concluding observations are given in Section V.
THERE seems to be a role reversal of sorts in the inter-bank call money market. Excepting a few big fish, most nationalised banks, traditionally lenders in the overnight lending and borrowing market, have turned borrowers.
With a large portion of their funds locked in government securities, many public-sector banks are now facing dearth of liquidity in patches, say bankers.
" We have even borrowed up to Rs 600-700 crore on a particular day'', said an official in a public-sector banker.
The increased demand for funds seems to be due to a combination of factors - - a pick-up in credit disbursal witnessed over the past month, being the prominent among them. Other requirements are more routine needs such as fulfilment of statutory norms, the cash reserve requirement, deposit redemption and asset-liability management of these banks.
" With demand for large funds coming from the oil sector over the past 6-8 weeks, we have been resorting to borrowing in the call money market as a stop-gap arrangement for funding needs,'' confided the treasury head of a public-sector bank. The rates in the call money market had been low and `attractive' in the 5.50-5.60 per cent range, much lower than the average cost of funds at 6.75 per cent, he added.
Public-sector banks are locked into their holdings in government securities at the moment. Said the treasury head of a nationalised bank: "We had bought these g-secs at higher prices and therefore it does not make sense to sell them now and
book losses when the market is dull.''
With prices dropping in the g-secs market over the past fortnight as much as Rs 5-10, public sector banks are sitting on depreciation in the value of their holding. On an average 40-45 per cent of most nationalised banks' balance sheets were invested in `zero-risk' government securities, said a debt market analyst. However, the liquidity in the system has not vanished over-night. Bankers are keeping their fingers crossed with the hope that g-sec prices will rise once again on quelling of tensions in West Asia.
If and when g-sec prices rise again, the banks can sell their stocks, realise funds plus book profits.
Meanwhile, there have also been some unusual lenders in the call money market which include private-sector banks, who are by nature borrowers. "Having sold our positions in g-secs over the past fortnight, we are now sitting on pots of cash, which have to be lent out,'' said the trading head of a private sector.
Call money rates ruled at around 7.75-8% last week. Demand remained modest despite a scheduled auction of Rs 5,000 crore and was adequately matched by available supplies. Consequently, call rates were steady.
Also, as liquidity was aided by RBI’s reported intervention in the forex market (buying dollars), inter-bank rates remained supported at around the current levels.
The average repo numbers at the liquidity adjustment facility window stood at Rs 12,149 crore against Rs 13,332 crore previously, while the average reverse repo figure was up at Rs 210 crore against Rs 171 crore of the previous week.
The cumulative collateralised borrowing and lending obligation volumes for the week fell to Rs 72,994 crore from Rs 97,246 crore.
The overnight weighted average yield was lower at 7.2366% against 7.2439% in the previous week. Inter-bank rates would re-align in case RBI tightens rates in the policy review.
Rates on the call money market ended in a range of 7.7-7.9%, down from the previous closing levels of 7.8-8%. RBI mopped up bids worth only Rs 210 crore through the reverse repo operations at the second session of liquidity adjustment.
On the other hand, the central bank infused funds worth Rs 12,115 crore through the repo operations under both sessions. The bond market did witness some improvement in volumes on Tuesday, while prices rose by almost 20 paise.
Traders expected the inflation to soften in the weeks ahead, and interest rates to rise at a slower pace, after the government cut import duty on some items. The yield on the benchmark 8.07% 2017 bond ended at 7.87%, lower than the previous close
of 7.9%.
Traders widely expect a 25 basis point increase in interest rates when RBI announces its quarterly policy review on January 31.
The government reduced import duties on a variety of items late on Monday after annual inflation hit a two-year high of 6.12%, breaking above the central bank’s estimate of 5-5.5% at March-end.
market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the InterBank Market.
Banks borrow in this money market for the following purpose:
• To fill the gaps or temporary mismatches in funds
• To meet the CRR & SLR mandatory requirements as stipulated by the Central bank
• To meet sudden demand for funds arising out of large outflows.
Thus call money usually serves the role of equilibrating the short-term liquidity position of banks
Call Money Market Participants :
1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs
2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.
Reserve Bank of India has framed a time schedule to phase out the second category out of Call Money Market and make Call Money market as exclusive market for Bank/s & PD/s.
The most active segment of the money market has been the call money market, where the day to day imbalances in the funds position of scheduled commercial banks are eased out. The call notice money market has graduated into a broad and vibrant institution .
Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money".
When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.
The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are
allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken steps to make the call/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed access to this market beyond December 31, 2000.
From May 1, 1989, the interest rates in the call and the notice money market are market determined. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1 - 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day variations are also not uncommon. Hence there is
a high degree of interest rate risk for participants. In view of the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. This will facilitate quick and timely debit and credit operations. The call market enables the banks and institutions to even out their day to day deficits and surpluses of
money. Banks especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR).
The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis.
The overnight call money or the inter-bank money market rate is presumably the most closely watched variable in day-to-day conduct of monetary operations and often serves as an operating target for policy purposes. The choice of operating tactics
from quantity to rate based targeting, following the IS/LM based analysis of Poole (1970), has been largely accepted in favour of interest rate targeting, because of the diminished link between monetary aggregates and economic objectives of monetary
policy as a result of the fast pace of financial innovations. Most central banks, therefore, presently use indirect instruments in an attempt to maintain the short term interest rate at a desirable level with the use of appropriate liquidity management practices. The most common of these instruments of liquidity management is the central banks’ repo facility which enables modulation of the marginal liquidity on a day to day basis so as to ensure stable conditions in the money market and, particularly, to maintain the short term money market rate as close as possible to the official/policy rate. Changes in the short-term policy rate made by central banks provide signals to markets, and various segments of the financial system, therefore, respond by adjusting interest rates/returns depending on their sensitivity and the efficacy of the transmission mechanism. Economic implications for investment and spending decisions of producers and households follow as usual,
thereby affecting the working of the real sector viz., changing aggregate demand and supply, and eventually inflation and growth in the economy. It is, therefore, clear that the interest rate stance of a central bank and its implications for economic activity and inflation play an important role in the conduct of monetary policy.
The objective of the paper is, therefore, to assess the volatility pattern of the call money rate in India during the last three years and to estimate its sensitivity vis-à-vis the Reserve Bank of India’s liquidity adjustment facility (LAF) auction decisions for the purpose of eliciting underlying market characteristics. Attempt is made to provide evidence, albeit indirectly, on how
regulatory changes related to other instruments in the money market may have affected the functioning of the interbank call money market. Finally, some evidence is also offered on the link between money market volatility and interest sensitive
financial markets, particularly the government securities market.
The remainder of the paper is structured as follows. Section I provides an overview of liquidity management in India while cross-country experience is set out in Section II. Data used in the analysis are explained in Section III. Methodology used and the empirical analysis are presented in Section IV and concluding observations are given in Section V.
THERE seems to be a role reversal of sorts in the inter-bank call money market. Excepting a few big fish, most nationalised banks, traditionally lenders in the overnight lending and borrowing market, have turned borrowers.
With a large portion of their funds locked in government securities, many public-sector banks are now facing dearth of liquidity in patches, say bankers.
" We have even borrowed up to Rs 600-700 crore on a particular day'', said an official in a public-sector banker.
The increased demand for funds seems to be due to a combination of factors - - a pick-up in credit disbursal witnessed over the past month, being the prominent among them. Other requirements are more routine needs such as fulfilment of statutory norms, the cash reserve requirement, deposit redemption and asset-liability management of these banks.
" With demand for large funds coming from the oil sector over the past 6-8 weeks, we have been resorting to borrowing in the call money market as a stop-gap arrangement for funding needs,'' confided the treasury head of a public-sector bank. The rates in the call money market had been low and `attractive' in the 5.50-5.60 per cent range, much lower than the average cost of funds at 6.75 per cent, he added.
Public-sector banks are locked into their holdings in government securities at the moment. Said the treasury head of a nationalised bank: "We had bought these g-secs at higher prices and therefore it does not make sense to sell them now and
book losses when the market is dull.''
With prices dropping in the g-secs market over the past fortnight as much as Rs 5-10, public sector banks are sitting on depreciation in the value of their holding. On an average 40-45 per cent of most nationalised banks' balance sheets were invested in `zero-risk' government securities, said a debt market analyst. However, the liquidity in the system has not vanished over-night. Bankers are keeping their fingers crossed with the hope that g-sec prices will rise once again on quelling of tensions in West Asia.
If and when g-sec prices rise again, the banks can sell their stocks, realise funds plus book profits.
Meanwhile, there have also been some unusual lenders in the call money market which include private-sector banks, who are by nature borrowers. "Having sold our positions in g-secs over the past fortnight, we are now sitting on pots of cash, which have to be lent out,'' said the trading head of a private sector.
Call money rates ruled at around 7.75-8% last week. Demand remained modest despite a scheduled auction of Rs 5,000 crore and was adequately matched by available supplies. Consequently, call rates were steady.
Also, as liquidity was aided by RBI’s reported intervention in the forex market (buying dollars), inter-bank rates remained supported at around the current levels.
The average repo numbers at the liquidity adjustment facility window stood at Rs 12,149 crore against Rs 13,332 crore previously, while the average reverse repo figure was up at Rs 210 crore against Rs 171 crore of the previous week.
The cumulative collateralised borrowing and lending obligation volumes for the week fell to Rs 72,994 crore from Rs 97,246 crore.
The overnight weighted average yield was lower at 7.2366% against 7.2439% in the previous week. Inter-bank rates would re-align in case RBI tightens rates in the policy review.
Rates on the call money market ended in a range of 7.7-7.9%, down from the previous closing levels of 7.8-8%. RBI mopped up bids worth only Rs 210 crore through the reverse repo operations at the second session of liquidity adjustment.
On the other hand, the central bank infused funds worth Rs 12,115 crore through the repo operations under both sessions. The bond market did witness some improvement in volumes on Tuesday, while prices rose by almost 20 paise.
Traders expected the inflation to soften in the weeks ahead, and interest rates to rise at a slower pace, after the government cut import duty on some items. The yield on the benchmark 8.07% 2017 bond ended at 7.87%, lower than the previous close
of 7.9%.
Traders widely expect a 25 basis point increase in interest rates when RBI announces its quarterly policy review on January 31.
The government reduced import duties on a variety of items late on Monday after annual inflation hit a two-year high of 6.12%, breaking above the central bank’s estimate of 5-5.5% at March-end.
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