L.S.

RAHEJA COLLEGE OF ARTS & COMMERCE Juhu Road, Santacurz (West), Mumbai 400054

PROJECT REPORT ON CALL MONEY MARKET

IN PARTIAL FULFILLMENT OF REQUIREMENT OF S.Y.B.B.I (Banking & Insurance) [Semester III]

SUBMITTED BY PINAL PARSANA

PROJECT GUIDE PROF. MEGHNA MENON

UNIVERSITY OF MUMBAI

ACADEMIC YEAR 2012-2013

DECLARATION
I, PARSANA PINAL of L.S.RAHEJA COLLEGE of Arts and Commerce, SYBBI Semester III, hereby declare that I have completed this project on CALL MONEY MARKET in the academic year 2012-2013. The information submitted is true and original to the best of my knowledge.

Prof. Meghna Menon (Internal guide)

Pinal Parsana (Student)

CERTIFICATE
I, Prof. MEGHNA MENON hereby certify that PINAL PARSANA, student of L.S.RAHEJA College of Arts & Commerce, of SYBBI Semester III has completed project on CALL MONEY MARKET in the academic year 20122013. The information submitted is true and original to the best of my knowledge.

Prof. Harshad. M. Janjarkiya (Co-ordinator)

Dr. (Mrs.) M. B. Madlani (Principal)

Prof. Meghna Menon External Examiner (Internal Examiner)

ACKNOWLODGEMENT

The satisfaction and euphoria that accompanies the successful completion of any task would be incomplete without mentioning the names of people who made it possible, whose constant guidance and crown all the efforts with success.

I am most thankful to my internal guide, Prof. Meghna Menon, for introducing me to such a wonderful and challenging topic because of which I learnt about the world and especially about the various frauds that take place in detail and for being my guide in the true sense of the word and for guiding, correcting and motivating me at each and every moment during my project. I also value her generosity.

I would also like to thank Mr. Harshad Janjarkiya, our co-ordinator to whom we shall forever remain in debt for setting the foundation for this course and for assisting in the project whenever help was required.

Last but not the least, I thank my friends, who helped directly or indirectly in completing the project that will go a long way in my career, the project is really knowledgeable & memorable one.

TABLE OF CONTENTS Sr.No Particulars Page No. 1 2 3 4 5 6 7 8 9 Introduction Call Money Market In India Call Money Market Participants Locations of Call Money Market Call Rate in Call Money Market Size of Call Money Market Factors Affecting Call Money Market Conclusion Bibliography 7 9 11 14 15 19 20 22 23

Summary
Money Market is a centre in which financial institutions join together for the purpose of dealing in financial or monetary assets, which may be of short term maturity or long term maturity. The short term means, generally a period up to one year and the term near substitutes to money, denotes any financial asset which can be quickly converted into money with minimum transaction cost.

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

Introduction
What is Call Money Market? It is part or term of Money Market. Let understand Money Market. Money Market: The money market is a subsection of the fixed income market. We generally think of the term fixed income as being synonymous to bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities.

Money market securities are essentially IOUs issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.

One of the main differences between the money market and the stock market is that most money market securities trade in very high denominations. This limits access for the individual investor. Furthermore, the money market is a dealer market, which means that firms buy and sell securities in their own accounts, at their own risk. Compare this to the stock market where a broker receives commission to acts as an agent, while the investor takes the risk of holding the stock. Another characteristic of a dealer market is the lack of a central trading floor or exchange. Deals are transacted over the phone or through electronic systems. The easiest way for us to gain access to the money market is with a money market mutual funds, or sometimes through a money market bank account. These accounts

and funds pool together the assets of thousands of investors in order to buy the money market securities on their behalf. However, some money market instruments, like Treasury bills, may be purchased directly. Failing that, they can be acquired through other large financial institutions with direct access to these markets.

Call Money Market: A short-term money market, which allows for large financial institutions, such as banks, mutual funds and corporations to borrow and lend money at interbank rates. The loans in the call money market are very short, usually lasting no longer than a week and are often used to help banks meet reserve requirements. Call money market is that part of the national money market where day-today surplus funds, mostly of banks are traded in. The loans made in this market are of a short term nature, their maturity varying between one day to a fortnight. As these loans are repayable on demand on the option of either the lender or the borrower, they are highly liquid, their liquidity being exceeded only by cash.

Call Money Market In India As we know Call Money Market is highly dependent on Call loans and they are given at particular rate known as Call Rate. Call loans in India are given: 1. To the bill market 2. For the purpose of dealing in the bullion market and stock exchanges. 3. Between banks 4. To High Networth Individual (HNI)s for ordinary trade purposes in order to save interest on cash credit and overdrafts. Among these users, inter bank use has been the most significant and their use in stock exchanges and other markets has been modest. Banks borrow from other banks in order to meet a sudden demand for funds, large payments, large remittances and to maintain cash or liquidity with the RBI. Until March 1978, transactions in the call money market were usually effected through brokers. Each day these brokers obtained information about money on offer and money demanded and then effected the transactions. Since then, however, RBI has prohibited banks paying brokerage on operations in the call money market as it has stopped payment of brokerage on deposits.

Call loans in India have a maturity anywhere between one day to a fortnight. Money at call and short notice are highly liquid assets in the balance sheet of the bank. Call loans in India are unsecured.

Call loans in India are subject to seasonal fluctuations. The seasonal nature of the call money market would be reflected in two indicators: a) A decline in money at call and short notice should be greater in the slack season than in the busy season of a given year. b) An increase in money at call and short notice should be greater in the busy season than in the slack season. The need for call money borrowings is highest around March to meet year end tax payments and withdrawal of funds by financial institutions to meet their statutory obligations. Call money borrowings tend to increase when there is an increase in CRR.

Call Money Market Participants Participants of call money market include:

1. Scheduled Commercial Banks 2. Non Scheduled Commercial Banks 3. Foreign Banks 4. State District and Urban Co-operative Banks 5. DFHI 6. STCI 7. Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.

DFHI and STCI just like banks and other primary dealers borrow and lend in the call money market.

Earlier only few large banks, particularly foreign banks, used to operate in call money market. But now the market has expanded to encompass also the small banks and non scheduled banks.

Earlier foreign banks were primarily lenders in this market. However, now their participation as borrowers has increased for meeting CRR requirements together with their difficulty in tapping deposits due to lack of branches and increase in the cost of servicing FCNR deposits.

The SBI group kept itself away from call money market till 1970 but now has become a major lender and only a small borrower in the call money market.

Earlier institutions like GIC, LIC and UTI were keeping funds with a very small number of big banks which had a sort of monopoly use of vast cash resources of these institutions. Through the call market, it has now become possible for many banks to fall upon these institutions in times of financial stringency. On the other hand, these institutions have a greater flexibility in investing their funds and thereby increasing the income on their resources.

Continuous participation in the call market helps to integrate the long term and short term money markets in the economy. Investment in call market by non banking financial institutions has raised certain important issues. 1. First whether with long term funds should they enter at all into the short term market? 2. Second, these institutions direct participation in the call money market has a potential for weakening the monetary policy of the RBI. An access to funds by banks outside the banking system means that they can weaken the effect of monetary techniques, such as, changes in reserve requirements, bank rate and selective credit control.

In this context, the Working Group on the Money Market (Vaghul Working Group) was appointed by RBI in 1987 on the working of call money market. On the basis of this report, the authorities have removed the ceiling on the call rate for all the participants.

As per the latest RBI policy, LIC, UTI, GIC and NABARD are allowed to participate in the call money market as lenders and not as borrowers only after they provide evidence to the RBI about their having bulk resources and having no

outstanding borrowings from the banks. Furthermore they are required to observe a minimum size of operation of Rs.20 cr per transaction. They can participate with prior permission of RBI and only through DFHI.

There is a view that there are imperfections in call money market in the sense that only a few rich banks supply funds and they tend to make quick gains by pushing call rates by forming cartels. Another view is that even if cartels are non existent, there is no call market proper in India because there is a very small group of lenders and large number of borrowers in this market.

Locations of Call Money Market Where is call Money Market located? Call money markets are mainly located in big industrial and commercial centers like Mumbai, Calcutta, Chennai, Delhi and Ahmedabad with Mumbai and Calcutta being important centers from the point of view of the size and buoyancy of the market. Due to presence of head offices of RBI, many bank, LIC, UTI together with big stock exchanges of country being present in Mumbai, it has become the hub of call money activities. The geographical integration of call markets, however, is still far from perfect resulting in considerable differences in call rates prevailing in different centers. There are large number of local markets developed and operated by ingenious local banks. For example in Saurashtra in Gujarat when large payments or remittances are to be made, the local banks help each other with local funds. Among some banks, they are regular arrangements without the payment of interest. For other banks, the price of overnight money is two paisa per hundred rupees for overnight lending.

Call Rate in Call Money Market The rate of interest paid on call loans is known as the call rate. The call rate is highly volatile and varies from day to day, hour to hour. It varies from center to center and is very sensitive to the supply and demand of call loans. Call rates in India till 1973 were determined by market forces. In 1973 on account of credit squeeze of RBI, call rates reached an all time high of 30% in Dec 1973. To regulate this, IBA informally fixed a ceiling of 15% on the level of call rate which was subsequently reduced to 12.5% in March 1976, 10% in June 1977, 8.6% in March 1978 and 10% in April 1980. Now, this ceiling in call rates have been removed in two stages: 1. Effective Oct 1988, the operations of DFHI were exempted from ceiling. 2. Effective May 1989, the ceilings on the call rate and inter bank money rate were withdrawn. Call rate have been deregulated since 1989. There are now two call rates in India: 1. The inter bank call rate. The lending rate of DFHI in the call market Bank rate is the rate at which banks can borrow funds from their Central Bank. In India, the call rate has always been more than the Bank Rate till 1975-76 after which it has been sometimes below and sometimes above the Bank Rate. 2. DFHI call lending rate has usually been higher than the average inter bank call rate. There is also greater amount of volatility in DFHI lending rates compared to inter bank call rates.

Call Rate Vs Bank Rate Bank rate is the rate at which banks can borrow funds from their Central Bank. In India, the call rate has always been more than the Bank Rate till 1975-76 after which it has been sometimes below and sometimes above the Bank Rate. DFHI call lending rate has usually been higher than the average inter bank call rate. There is also greater amount of volatility in DFHI lending rates compared to inter bank call rates.

Reason for Call Rate Volatility Call rates are highly volatile in market similar to bank rates. Following are reason for the same: 1) Large borrowings on certain dates by banks to meet the CRR requirements and sharp reduction in the demand of call money once CRR needs are meet. The rates rise sharply in the first week of the fortnight and subside in the second week when banks have covered their cash reserve requirements. 2) The credit operations of certain banks tend to be much in excess of their own resources. These banks over extended credit position treat call market as a source of funds for meeting disequilibria in their sources and uses of funds. 3) The occasional factors in the market also affect the volatility. For example, in the recent past, the call rate has shot up due to disruption in the banking industry. 4) The withdrawal of funds by institutional lenders to meet their business needs and by the corporate sector for payment of advance tax leads to steep increase in the call rate.

5) The liquidity crisis in money market also contributes to call rate volatility. When call money market is easy, banks invest funds in government securities, units and public sector bonds in order to maximize earnings. But with no buyers in the market, these instruments tend to become illiquid which accentuates liquidity crisis and pushes up rates in the call market. 6) The mismatch between asset liability of commercial banks arising out of massive demand for non-food credit as against sluggish growth in bank deposits is another relevant factor. 7) Activity in forex market and call money markets have of late been inter linked. 8) The technical modalities of the calculation of reserves requirement also leads to sharp swings in the call rates. 9) The structural deficiencies in the banking system and the practice of banks to window dress their deposits also have been important contributing factors in this context.

Methods for Controlling Call Rates

There are certain measures are taken by RBI and other participants for controlling call rates in Call Money Market. Inspite of intervention by the DFHI, channelisation of more funds by the RBI through DFHI, channelisation of funds by certain financial institutions with surplus funds, the increase in number of participants and the softening of penalties in CRR shortfalls have not helped to moderate interest rate volatility in the call money market. RBI has introduced many measures to stabilize call rate volatility. Some of them are: 1. Money market support 2. Repos operations 3. Foreign exchange purchases 4. Enhancing government securities refinancing. Banks are the net lenders while PDs are net borrowers in the call money market. The pure inter bank call market is yet to develop in India.

Size of Call Money Market

The size of call money market has been smaller than that of the US and UK. This may be due to the following factors: The bill market in India is underdeveloped and so the call loans to the bill market cannot but be small. In developed markets the amount of call loans depended and supplied is large. Unlike in the UK, direct discounting facilities are available to banks with RBI as a result of which they have much less need for loans from the money market. Further Indian commercial banks have fairly large cash reserves; therefore, their need to borrow from call market is much less.

Unlike in the US, loans to security dealers is not readily available. Due to many restrictions imposed by RBI, trading activity on stock exchanges in India is undertaken by members using funds which are mostly derived from private sources.

Factors Affecting Call Money Market

Variations in the volume of demand for and supply of call loans are caused by many factors: Extent of deposits accrual of the banking system. Increase in deposits with banks, other things being equal, would induce banks to explore possibilities of investment. Since call loans are one of the avenues of investment, the supply of call loans would increase when there is an increase in deposits. If the deposits accrue to all the banks, then supply of funds to borrowers outside banking system would increase. Demand for call loans would depend upon the buoyancy of the stock market and the increase in the demand of loans for industrial and commercial purposes.

The size of call loans is also determined for the possibility of quick investment or liquidation of government securities, treasury bills and other short term investments. Demand for call money tends to increase in Dec., Mar., June and Sept. i.e. when quarterly advance tax payments are to be made The speed with which the remittance and clearance system works in a country also impacts the volume of call loans.

 It has been observed that the system of maintaining reserves on a weekly basis, coupled with the manipulation of the SLR, makes banks operate in the call money market as the lenders and borrowers. This pressure on the market reaches a peak towards the end of the banking week i.e. on Friday when there is a scramble for funds to make up the shortfall in the amount of required reserves. Foreign exchange activity also has been a significant determinant of the call market activity in recent years.

Conclusion Following conclusion can be drawn about call money market: The call money market is a market for very short-term funds repayable on demand and with a maturity period varying from one day to a fortnight Helps bank to manage shot term deficit & surplus The rate at which funds are borrowed in known as Call Rate. Its a highly volatile rate; it varies from day to day hour to hour and sometimes even minute to minute. It in very sensitive to changes in demand and supply of call loans.

Bibliography http://rbidocs.rbi.org.in http:// en.wikipedia.org/wiki/Money_market_in_India http://www.investopedia.com/ Financial Market and Services