CALL MONEY MARKET

Meaning
Call money market is that part of the
national money market where the dayto-day 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

and at the option of either the lender or
the borrower, they are highly liquid, their
liquidity being exceeded only by cash.
The nature of Call money market in
different countries varies from each other.

Differences in institutional structures account

for differences in the nature, participants,
purposes or types of transactions in such
markets.
All, however, have one common feature:
They deal in loans which have a very
short maturity and are highly liquid.

As R S Sayers has pointed out,

Everywhere banks look in their assets for
a nice combination of profit and liquidity,
and this leads to a considerable degree
of similarity in balance sheet structures.
The similarity cannot amount to
uniformity because there is no uniform
availability of assets for bankers in
different countries.

CALL MONEY MARKET IN INDIA

The call loans in India are given :
To the bill market
For the purpose of dealing in the bullion
markets and stock exchanges
Between banks, and
Frequently to individuals of high financial
status in Mumbai for ordinary trade
purposes in order to save interest on cash
credits and overdrafts.

Among these uses inter-bank use has

been the most significant and their use
on stock exchanges and other markets
has been modest.
Call loans in India have a maturity anywhere between
one day to a fortnight.
While the call money market deals in overnight funds,
notice money market deals in funds for 2-14 days.
Money at call and short notice in the balance sheets of
commercial banks is a highly liquid asset.
Unlike in other countries, call loans in India are
unsecured.

Money and credit situation in India every

year is subject to seasonal fluctuations.
Unlike in other countries, transactions or
trading on the call money market is also
believed to be characterised by seasonal
variations.
The seasonal ups and downs are believed
to be reflected in the volume of money at
call and short-notice, and call money
rates at different times of the year.

The seasonal nature of the call money

market would be reflected in two
indicators:
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.
An increase in money at call and short
notice should be greater in the busy
season than in the slack season.

PARTICIPATION

Participants in the call money market

are

a.

Scheduled commercial banks

Non-scheduled commercial banks
Foreign banks
State, district and urban, cooperative
banks

b.
c.
d.

e. Discount and Finance House of India

(DFHI)
f. Securities Trading Corporation of India
(STCI)

CALL RATES

The rate of interest paid on call loans

is known as the call rate.
The call rate is highly variable from
day to day, and often from hour to
hour. It varies from centre to centre
also.
It is very sensitive to changes in
demand for and supply of call loans.

VOLATILITY IN CALL RATES

Variations According to Trading Centres
Among three important centres
Mumbai, Calcutta and ChennaiThe call rate is highest in Calcutta and
the lowest in Mumbai.

The relatively higher rate in Calcutta may

be due to the fact that the demand for
funds there is greater than the supply,
compared to the situation in Mumbai.
The supply of call loans in Mumbai is
greater owing to the location of the head
offices of not only many banks but also of
several other non-banking financial
institutions like LIC and UTI.

The demand for funds in calcutta is

greater because the volume of trade
there is greater.
Not only is the demand greater, but it is
concentrated because of the large
number of commodities dealt in and the
overlapping of seasons.

The trading in commodities like jute,

tea and coal absorbs a large amount of
funds.
Also, contacts between the indigenous
bankers and the organised money market
in Calcutta are relatively weak. This
results in a smaller flow of funds across
markets, leading to an increase in
interest rate.

CALL RATE VIS-A-VIS BANK

RATE
As borrowing from the RBI
constitutes an important alternative
source of accommodation for banks,
the relation between the bank rate
and the call rate is significant.

In India, except in 1955-56,the call rate

(Mumbai) has exceeded the bank rate till
1975-76, after which it has been
sometimes higher and sometimes lower
than the bank rate.

REASONS FOR CALL RATE

VOLATILITY
The extreme volatility of the call rate can be
attributed to factors such as the following:
1.

Large borrowings on certain dates by banks to

meet the CRR requirements and sharp
reduction in the demand for call money once
CRR are met. The call rates rise sharply in the
first week of the reporting 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 with
overextended credit position treat call market
as a source of funds for meeting structural
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
had 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 crises or illiquidity in money
markets also contributes to the call rate
volatility. Banks invest funds when call
market is easy) in government securities,
units, and public sector bonds in order to
maximise earnings from their funds
management.
Cont

But with no buyers in the markets,

these instruments tend to become
illiquid which highlight liquidity
crisis in the call market pushing up
the call rate significantly.

7. In the recent past, the forex market and

call money market have become quite
closely interlinked; the changes in the
former have come to affect the latter
significantly.
The sharp increases in call rates on
November 3,1995, and again between
the middle of February to the middle of
March 1996 were largely due to the
turbulence in the forex market, and the
RBI intervention in the forex market.
Cont

The RBI intervention in order to prevent

the unusual depreciation of the rupee,
and the temporary withdrawal of the
money market support so as to first
stabilise the forex markets have become
important factors behind the flaring of call
rates into the recent past.
8.The technical modalities of the
calculation of reserves requirements also
leads to sharp swings in the call rate.

9.The structural deficiencies in the banking

system and the practice of the banks to
window-dress their deposits also have
been the important contributory factors
in this context.