Call / Notice Money Market

The Call / Notice Money Market is a crucial segment of the Indian money market that facilitates very short-term borrowing and lending of funds among financial institutions. It plays a vital role in maintaining day-to-day liquidity in the banking system and acts as a sensitive indicator of monetary conditions in the economy. Within the broader framework of banking and finance, the Call / Notice Money Market supports efficient funds management, transmission of monetary policy, and overall financial stability in India.

Concept and Meaning of Call / Notice Money Market

The Call / Notice Money Market refers to a market where funds are borrowed and lent for extremely short durations. When funds are borrowed for one day, it is known as call money, while borrowing for more than one day and up to fourteen days is referred to as notice money. These transactions are unsecured and are primarily conducted among banks and select financial institutions.
Due to the absence of collateral and the short maturity period, interest rates in this market are highly sensitive to changes in liquidity conditions. The call money rate, therefore, is widely regarded as a benchmark for short-term interest rates in the Indian financial system.

Historical Development in India

The Call Money Market in India developed as part of efforts to create an organised and efficient money market. Initially dominated by banks, the market gradually expanded with regulatory reforms aimed at improving transparency, discipline, and monetary control. Over time, participation was streamlined to strengthen the interbank nature of the market and reduce systemic risks.
Financial sector reforms introduced since the 1990s significantly enhanced the depth and efficiency of the Call / Notice Money Market. These reforms helped align the market with international best practices and improved the effectiveness of liquidity management by monetary authorities.

Role of the Reserve Bank of India

The Call / Notice Money Market operates under the regulatory oversight of the Reserve Bank of India, which uses it as a key instrument for implementing monetary policy. By influencing liquidity through repo and reverse repo operations, the central bank indirectly impacts call money rates.
The RBI closely monitors movements in call and notice money rates, as sharp fluctuations may indicate liquidity stress or excess liquidity in the banking system. Thus, this market acts as a real-time barometer of monetary conditions in the economy.

Participants and Structure

The principal participants in the Call / Notice Money Market are scheduled commercial banks. Other institutions such as primary dealers may also participate, subject to regulatory guidelines. Non-bank participants have been gradually phased out to preserve the market’s stability and reduce volatility.
Transactions are conducted on an overnight or short-term basis, and funds are typically used to meet reserve requirements, manage mismatches in cash flows, or address temporary liquidity shortages. Since the market is unsecured, participants rely heavily on mutual trust and creditworthiness.

Importance in Banking and Finance

For banks, the Call / Notice Money Market is an essential tool for liquidity management. It allows institutions with surplus funds to lend efficiently, while those facing short-term deficits can borrow quickly without liquidating assets. This flexibility helps banks comply with statutory requirements and manage operational risks.
From a financial system perspective, the market ensures the smooth functioning of payment and settlement systems. It also supports interest rate alignment across different segments of the money market, thereby enhancing overall financial integration.

Significance for the Indian Economy

The Call / Notice Money Market contributes to economic stability by ensuring efficient allocation of short-term funds. Stable and orderly movements in call money rates help maintain confidence in the banking system and support uninterrupted credit flow to productive sectors of the economy.
As a key channel for monetary policy transmission, changes in policy rates are quickly reflected in call money rates, influencing other interest rates in the economy. This linkage strengthens the effectiveness of monetary policy in controlling inflation and supporting economic growth.

Advantages and Limitations

One of the main advantages of the Call / Notice Money Market is its high liquidity and flexibility, enabling rapid adjustment to changing financial conditions. It also promotes interbank cooperation and efficient funds utilisation.
However, the market is susceptible to volatility during periods of liquidity stress, such as financial crises or tight monetary conditions. Since transactions are unsecured, excessive dependence on this market may expose banks to counterparty risk if not properly managed.