The call money market is concerned with short-term financial assets that are close substitutes for money and are repayable on demand as a form of liquid money. They are mostly used by banks to meet their short-term capital requirements and to stay in equilibrium. Before we jump to call money market let’s understand what Money Market is in the first place.
What Is Money Market?
The money market is an organized exchange market where one can lend and borrow short-term, high-quality debt securities with an average maturity of one year or less. It enables governments, banks, and other large institutions to sell short-term securities to fund their short-term cash flow needs.
Money market instruments typically include Certificate of Deposit (CD), Commercial Paper (CP), Inter Bank term Money, Bill Rediscounting, Call/ Notice/ Term Money, Inter Bank Participation Certificates and Treasury Bills. Money market in India is regulated by the Reserve Bank of India (RBI).
What is Call Money Market?
The call money market is the most liquid of all short-term money market segments, with a maturity period of one day. The tenure of call money loan ranges from one day to fourteen days after the disbursement of the amount is made by the lending institution. In the call money market, any amount can be lent or borrowed at a market-determined interest rate that is acceptable to both the borrower and the lender.
Call Money Market in India
Call money market deals with day-to-day requirements of funds. The purpose of call loans is to deal in the bullion market and stock exchanges.
- Money lent for one day is called call money.
- Money lent for more than one day and less than 15 days is called Notice Money.
- Money lent for more than 15 days is called term money.
Why do Banks Need Call Money?
- For managing temporary funding mismatches
- To comply with the cash reserve ratio (CSR) and the statutory liquidity ratio (SLR)
- For meeting excess demand caused by a net outflow of funds from disinvestment or imports
Call Money Market Features
1. High Liquidity: One of the most important characteristics of the call money market is the high liquidity it provides. They provide fixed income to the investor and have a short-term maturity. Because of this feature, call money market instruments are regarded as close substitutes for money.
2. Secure Investment: These financial instruments are among the most secure investment avenues available in the market. Since issuers and borrowers of call money market instruments have high credit ratings and the returns are fixed beforehand, the risk of losing invested capital is minuscule.
3. Competitive Interest Rates: The interest rate charged on a call loan between financial institutions is known as the call loan rate. Call money is used by brokers as a short-term source of funding to keep margin accounts open for customers who want to leverage their investments. The interest rate charged on loans used to purchase securities varies based on the call money rate set by the RBI.
4. Easy Transfers: The funds can be transferred between lenders and brokerage firms quickly. As a result, call money is the second most accessible asset in a balance sheet, trailing only cash. If the lender calls the funds, the broker can issue a margin call, which typically results in the automatic sale of securities in a client’s account (to convert the securities to cash) to repay the lender.
Participants of Call Money Market in India
Banks, Primary Dealers (PDs), Development Finance Institutions, Insurance companies, and select Mutual Funds are currently participants in the call money market. PDs and banks can act as both borrowers and lenders in the market. Non-bank institutions that have been granted specific permission to operate in the call money market, on the other hand, can only act as lenders.
How does Call Money Market work?
Loans are offered by lenders in the form of auctions in a Call Money Market (CMM), and borrowers place bids on them. These bids are made on interest rate biddings. As a result, the funds go to the bidder who offers the highest interest rate on a specific loan. Dealing of the money in a CMM is done through a Negotiated Dealing System (NDS) which is a regulated electronic trading platform. The rate of call money is strikingly volatile and varying due to several factors like fluctuating corporate demand, the volume of Bank deposits and cyclical fluctuation, among others.
The call money rate or interest rate is affected by liquidity demand and supply. A lack of liquidity causes the call money rate to rise, and vice versa. It is a monetary multiplier measurement.