Call Money Market

The Call Money Market is a vital component of the money market, dealing with very short-term funds that are borrowed and lent between financial institutions. It facilitates overnight and short-term liquidity adjustments within the banking system. In this market, funds are borrowed or lent for periods ranging from one day (call money) to fourteen days (notice money). The call money market plays a crucial role in ensuring financial stability, smooth settlement of interbank transactions, and effective implementation of monetary policy.

Meaning and Definition

The call money market refers to the short-term money market where banks and other financial institutions lend or borrow funds to manage their temporary cash shortages or surpluses. Borrowings that are repayable on demand are called call money, whereas those that require a short notice period (up to fourteen days) are called notice money.
The rate of interest charged in this market is known as the call rate. This rate fluctuates daily based on liquidity conditions, the demand for funds, and the availability of lendable resources. The call money market is often regarded as the “nerve centre” of the Indian money market due to its direct influence on short-term interest rates and liquidity.

Features of the Call Money Market

• Short-term Nature: Funds are borrowed or lent for extremely short durations—either overnight or up to fourteen days.
• Participants: Primarily consists of commercial banks, cooperative banks, primary dealers, and certain financial institutions.
• Purpose: To help banks maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per RBI norms.
• Mode of Transaction: Mostly unsecured, relying on mutual trust and institutional credibility.
• Highly Liquid: Due to the short-term nature of transactions, it provides immediate liquidity adjustments.
• Rate of Interest: The call rate changes frequently and acts as a sensitive indicator of liquidity conditions in the economy.

Participants in the Call Money Market

The call money market includes both borrowers and lenders.
Major Borrowers:

• Commercial Banks (to meet reserve requirements and short-term needs).
• Primary Dealers (for financing security transactions).

Major Lenders:

• Commercial Banks with surplus funds.
• Cooperative Banks.
• Select Financial Institutions.

Earlier, Non-Banking Financial Companies (NBFCs) and Mutual Funds also participated as lenders; however, regulatory restrictions by the Reserve Bank of India (RBI) have limited their direct participation to ensure market stability.

Functioning of the Call Money Market

The call money market operates as an interbank market, primarily facilitating short-term liquidity management.

1. Liquidity Assessment: Banks evaluate their daily liquidity positions after settlements and reserve requirements.
2. Borrowing and Lending: Banks with surplus funds lend to those with deficits, often for one day.
3. Rate Determination: The call rate is determined by the forces of demand and supply for funds in the market.
4. Repayment: The borrower repays the principal along with interest when the funds are “called” or after the agreed period.

Transactions are typically conducted through electronic systems such as the Negotiated Dealing System (NDS) and Real-Time Gross Settlement (RTGS) platforms.

Role of the Reserve Bank of India (RBI)

The Reserve Bank of India regulates and oversees the call money market to maintain stability and control liquidity. Its main functions include:

• Monitoring Call Rates: Keeping fluctuations within acceptable limits.
• Regulating Participants: Specifying eligible lenders and borrowers.
• Liquidity Management: Using tools like repo and reverse repo operations to inject or absorb liquidity.
• Supervision: Ensuring that the market operates transparently and efficiently.

The RBI also uses call rates as an indicator to assess short-term liquidity conditions and the effectiveness of monetary policy transmission.

Determinants of Call Money Rates

The call rate is highly sensitive to short-term liquidity and market sentiment. The main factors influencing it include:

• Monetary Policy Actions: Changes in repo or reverse repo rates directly affect call rates.
• Cash Reserve Requirements: Variations in CRR influence banks’ liquidity.
• Seasonal Factors: Year-end or festival seasons often lead to higher credit demand and higher call rates.
• Government Borrowing Programme: Large borrowings can drain liquidity from the system.
• Capital Flows: Inflows increase liquidity, while outflows reduce it.
• Market Expectations: Anticipations of future monetary policy changes also affect short-term interest rates.

When liquidity is ample, call rates remain low; when funds are scarce, call rates may rise sharply.

Importance of the Call Money Market

The call money market holds a central position in the financial system due to the following reasons:

• Facilitates Liquidity Adjustment: Helps banks and institutions manage day-to-day cash requirements.
• Supports Monetary Policy: Enables effective transmission of RBI’s policy measures.
• Enhances Financial Stability: Reduces chances of liquidity crises through interbank cooperation.
• Serves as a Benchmark: The call rate acts as a reference point for other short-term rates such as those on Treasury Bills, Commercial Papers, and Certificates of Deposit.
• Efficient Utilisation of Funds: Ensures that surplus funds of some institutions are utilised by others in need, improving overall market efficiency.

Advantages of the Call Money Market

• Flexibility: Funds can be borrowed and repaid quickly based on immediate needs.
• Safety: Involves transactions mainly between well-regulated institutions.
• Liquidity Management: Assists banks in meeting short-term liquidity mismatches.
• Indicator of Market Health: Reflects real-time monetary conditions and the state of liquidity in the economy.

Disadvantages and Limitations

• Volatility: Call rates can fluctuate sharply, causing uncertainty in the financial markets.
• Limited Participation: Only certain institutions are permitted, reducing depth and liquidity.
• High Dependence on Monetary Policy: Sensitive to central bank actions, making it unpredictable.
• Risk of Overreliance: Excessive borrowing from the call market can indicate poor liquidity management within banks.

Reforms in the Indian Call Money Market

The Indian call money market has undergone significant reforms to enhance transparency, efficiency, and stability:

• Vaghul Committee (1987): Recommended deregulation and development of the money market, including call money.
• Introduction of Electronic Trading: Use of NDS and RTGS systems for smooth settlement.
• Gradual Deregulation of Interest Rates: Allowing call rates to be determined by market forces.
• Restricted Participation: Limiting the call market to banks and primary dealers to ensure safety.
• Development of Alternative Instruments: Promotion of collateralised instruments like repo, Treasury Bills, and Commercial Papers to reduce pressure on the call market.

Recent Trends

In recent years, the call money market in India has exhibited greater stability due to improved liquidity management and the development of complementary short-term markets. The Weighted Average Call Rate (WACR), published daily by the RBI, serves as a key indicator of short-term liquidity and monetary stance.
Technological advancements, electronic trading systems, and the RBI’s liquidity adjustment framework have made the call money market more transparent and efficient.