It 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 upto one year and the term near substitutes to money, denotes any financial asset which can be quickly converted into money with minimum transaction cost.
Terms relating to Money Market
Money Market Refers to the market for short-term requirement and deployment of funds.
Call Money Money lent for one day
Notice Money Money lent for a period exceeding one day
Term Money Money lend for 15 days or more in Inter-bank market
Held till maturity Securities which are not meant for sale and shall be kept till maturity
Held for trading Securities acquired by the banks with the intention to trade by taking advantage of the short-term price/ interest rate movements will be classified under held for trading.
Available for sale The securities which do not fall within the above two categories i.e. HTM or HFT will be classified under available for sale.
Yield to maturity Expected rate of return on an existing security purchased from the market
Coupon Rate Specified interest rate on a fixed maturity security fixed at the time of issue.
Treasury operations Trading in government securities in the market. An investor Bank can purchase these securities in the primary market. Trading takes place in the secondary market.
Gilt Edged security Government security that is a claim on the government and is a secure financial instrument which guarantees certainty of both capital and interest. These securities are free of default risk or credit risk, which leads to low market risk and high liquidity.
CALL/NOTICE MONEY MARKET OPERATIONS IN INDIA
The money market is a market for short-term financial assets that are close substitutes of money. The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers. The call/notice money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis and under notice money market, funds are transacted for the period between 2 days and 14 days.
Banks borrow in this money market for the following propose.
• 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
Participants
Participants in call/notice money market currently include banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds. Of these, banks and PDs can operate both as borrowers and lenders in the market. But non-bank institutions (such as all-India FIs, select Insurance Companies or Mutual Funds), which have been given specific permission to operate in call/notice money market can, however, operate as lenders only. No new non-bank institutions are permitted to operate (i.e., lend) in the call/notice money market with effect from May 5, 2001. In case any eligible institution has genuine difficulty in deploying its excess liquidity, RBI may consider providing temporary permission to lend a higher amount in call/notice money market for a specific period on a case-by-case basis.
Effective from Aug 06, 2005 non-bank participants except Primary Dealers are to discontinue participate, to make the call money market pure inter-bank market.
Prudential norms of RBI
Lending of scheduled commercial banks, on a fortnightly average basis, should not exceed 25 per cent of their capital fund. However, banks are allowed to lend a maximum of 50% on any day, during a fortnight.
Borrowings by scheduled commercial banks should not exceed 100 per cent of their capital fund or 2 per cent of aggregate deposits, whichever is higher. However, banks are allowed to borrow a maximum of 125 per cent of their capital fund on any day, during a fortnight.
Interest Rate
Eligible participants are free to decide on interest rates in call/notice money market.
What is call money market ?
1 The call money is the money lent for one day
2 Deals with overnight borrowing and lending
3 The funds located through the money market can be utilized
4 To provide financing for the purchase of securities that can beadded to the portfolio of the investment firm
5 As a resource that will cover the margin accounts of thefirm's clients.
Why?
1 Helps Bank to manage short-term deficit or surplus of money
2 Provides funds that can be used to conduct transactionsbetween banks, or with other money market dealers
3 The call money loan essentially works in the samemanner as a day to day loan
4 Crosses international lines, with fundingopportunities located around the world
Market size
1 Market for very short term funds, known as money on call
2 The rate at which funds are borrowed in this market is called`Call Money rate'
3 The size of the market for these funds in India is between Rs60,000 million to Rs 70,000 million
4 Of which public sector banks account for 80% of borrowings
5 Foreign banks/private sector banks account for the balance20%.
Insight
1 The money market is a market for short-term financial assetsthat are close substitutes of money.
2 It is liquid and can be turned over quickly at low cost.
3 Provides an avenue for equilibrating the short-term surplusfunds of lenders and the requirements of borrowers.
4 The call money market forms an important segment of theIndian money market.
5 Under call money market, funds are transacted on overnightbasis
Banks borrow in this money market for the followingpropose.
1 To fill the gaps or temporary mismatches in funds
2 To meet the CRR & SLR Mandatory requirements asstipulated by the Central bank
3 To meet sudden demand for funds arising out of largeoutflows
4 Thus call money usually serves the role of equilibrating the short-term liquidity position of banks
Features
1 Affected by liquidity in the market
2 One of the segments of the money market
3 No physical address
4 Interest rates undergo a change on a day to day basis
5 RBI has prescribed prudential limits for banks
6 Transactions not secured by any collateral
Operations in call market
Borrowers and lenders contact each other over telephone.
The borrowers and lenders arrive at a dealspecifying the amount of loan and the rate of interest.
After the deal is over, the lender issues FBL cheque in favour of the borrower.
The borrower in turn issues call money borrowing receipt.
When the loan is repaid with interest, the lender returns thedulydischarged receipt.
The deal can be directly negotiated by routing it through the Discountand Finance House of India (DFHI).
The borrowers and lenders inform the DFHI about their fundrequirement and availability at a specified rate of interest.
Once the deal is confirmed, the Deal Settlement Advice is exchanged. In case the DFHI borrows, it issues a call deposit receipt to the lenderand receives RBI cheque for the money borrowed.The reverse takesplace in the case of lendings by the DFHI.
The duly discharged call deposit receipt is surrendered at the time of settlement.
Call loans can be renewed upto a maximum period of 14 days only andsuch renewals are recorded on the back of the deposit receipt by the borrower.
Entry barriers
The entry into this field is restricted by RBI.
Commercial Banks, Co-operative Banks and Primary Dealersare allowed to borrow and lend in this market.
Specified All-India Financial Institutions, Mutual Funds, andcertain specified entities are allowed to access to Call/Noticemoney market only as lenders.
Reserve Bank of India has recently taken steps to make thecall/notice money market completely inter-bank market.
Hence the non-bank entities will not be allowed access tothis market beyond December 31, 2000
Steps taken by rbi
Both the borrowers and the lenders are required to have currentaccounts with the Reserve Bank of India.
This will facilitate quick and timely debit and credit operations.
The call market enables the banks and institutions to even out theirday to day deficits and surpluses of money.
Banks especially access the call market to borrow/lend money foradjusting their cash reserve requirements (CRR).
The lenders having steady inflow of funds (e.g. LIC, UTI) look at thecall market as an outlet for deploying funds on short term basis.
Advantages
High Liquidity
High Profitability
Maintenance of SLR
Safe and cheap
Assistance to central bank operations
Disadvantages
Uneven Development
Lack of Integration
Volatility in Call Money rates
Advantages of call money
In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among themselves and such loans are called inter-bank loans. They are very popular in India. So many advantages are available to commercial banks. They are as follows:
High Liquidity: Money lent in a call market can be called back at any time when needed. So, it is highly liquid. It enables commercial banks to meet large sudden payments and remittances by making a call on the market.
High Profitability: Banks can earn high profiles by lending their surplus funds to the call market when call rates are high volatile. It offers a profitable parking place for employing the surplus funds of banks temporarily.
Maintenance Of SLR: Call market enables commercial bank to minimum their statutory reserve requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR requirements. In absence of call market, banks have to maintain idle cash to meet5 their reserve requirements. It will tell upon their profitability.
Safe And Cheap: Though call loans are not secured, they are safe since the participants have a strong financial standing. It is cheap in the sense brokers have been prohibited form operating in the call market. Hence, banks need not pay brokers on call money transitions.
Assistance To Central Bank Operations: Call money market is the most sensitive part of any financial system. Changes in demand and supply of funds are quickly reflected in call money rates and give an indication to the central bank to adopt an appropriate monetary policy. Moreover, the existence of an efficient call market helps the central bank to carry out its open market operations effectively and successfully.
Drawbacks of call money
The call market in India suffers from the following drawbacks:
Uneven Development: The call market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated with stock exchanges. Hence the market is not evenly development.
Lack Of Integration: The call markets in different centers are not fully integrated. Besides, a large number of local call markets exist without an\y integration.
Volatility In Call Money Rates: Another drawback is the volatile nature of the call money rates. Call rates very to greater extant indifferent centers indifferent seasons on different days within a fortnight. The rates very between 12% and 85%. One can not believe 85% being charged on call loans.
