call money market


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CALL MONEY MARKET Meaning Call money market is that part of the national money market where the day- to-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.

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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.

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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.

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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.

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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.

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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.

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

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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 Chennai- The call rate is highest in Calcutta and the lowest in Mumbai.

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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.

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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.

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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.

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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: 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 .

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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.

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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…

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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.

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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…

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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.

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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.

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