Explained: What is Call Money?
Banks have to maintain a minimum level of cash to meet the daily transaction level and also maintain the Cash Reserve Ratio i.e. the minimum cash balance that has to be maintained by banks. It is decided by Reserve Bank of India time to time.
- When the cash in banks falls below this minimum requirement due to sudden rise in demand caused by either festival season, holidays etc. they need quick supply of cash. Also, during such times, the ATMs need to be fully funded.
- Call money deals with day to day cash requirement of banks. Banks which are faced with cash shortage borrow from other commercial banks for a period of 1-14 days. When banks borrow for one day it is known as call-money. Any money borrowed for more than 1 day but maximum of 14 days is known as notice money.
- The rate at which these transactions take place is known as the call rate. Thus, banks resort to call money to fill temporary mismatches in funds and maintain short-term liquidity. It is the central point by which RBI is able to influence interest rates.
- In this segment, the primary dealers and banks are permitted to both borrow and lend while non-banking institutions like financial institutions, mutual funds, etc. are only permitted to lend by RBI.
- While the demand is mainly ruled by banks’ need to maintain cash ratios, but it provides a regular funding source for building short-term assets.
- The trends in the market suggest that the major participants are scheduled commercial banks, co-operative banks and primary dealers. The call rate is normally decided by the participating banks. This can vary from hour to hour. The relation between call rate and rate of interest on other securities is usually inversely related. The trends in call rates also have a bearing on other policy statements. Sharp declines in call rate are a sign of available liquidity in the market.
- In international markets, it signals short-term financing by various banking institutions to brokers for keeping and maintaining a marginal account.