What is Call Money Market?

Oct 16, 2015 12:17 IST

The call money market is an essential part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. 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 into money quickly at low cost and provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements of borrowers.

The loans are of short-term duration varying from 1 to 14 days, are traded in call money market. 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 Inter Bank Market.

Banks borrow in this money market for the following purpose:

  • To fill the gaps or temporary mismatches in funds
  • To meet the Cash Reserve Ratio(CRR) &  Statutory Liquidity Ratio(SLR) mandatory requirements as stipulated by the RBI
  • 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 in the Call Money Market:

As the RBI guideline, the participants in call/notice money market currently include scheduled commercial banks (excluding RRBs), Development Financial Institutions, Co-operative banks (other than Land Development Banks) and Primary Dealers (PDs), both as borrowers and lenders.

Interest Rate:

Eligible participants are free to decide on interest rates in call/notice money market. Calculation of interest payable would be based on the methodology given by the Fixed Income Money Market and Derivatives Association of India (FIMMDA).

Note: FIMMDA is an association of Commercial Banks, Financial Institutions and Primary Dealers. It is a voluntary market body for the bond, Money and Derivatives Markets.

What are Money Market Instruments?

Money market instruments are those instruments, which have a maturity period of less than one year. The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions. Call Money / Repo are very short-term Money Market products. The below mentioned instruments are normally termed as money market instruments:

  • Certificate of Deposit (CD)
  • Commercial Paper (CP)
  • Inter Bank Participation Certificates
  • Inter Bank term Money
  • Treasury Bills
  • Bill Rediscounting
  • Call/ Notice/ Term Money