BackDe-jargoned: call money
This segment pertains to day-to-day funds requirements of banks
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The Reserve Bank of India (RBI) will announce its fifth bi-monthly monetary policy review on 2 December. Most experts believe that policy rates—statutory liquidity ratio (SLR) and cash reserve ratio (CRR)—may come down. Their belief is based on the fact that macroeconomic fundamentals such as inflation and industrial production are in place.
Another indicator is call money rate. In the recent times, it has been observed that inter-bank call rates have fallen well below the RBI-desired level of 8%, the prevailing repo rate. Sharp dips in call rates signal liquidity available in the market. Thus, further increases the expectation of the central bank cutting rates in the upcoming monetary policy review.
WHAT IS CALL MONEY?
The call money market is an important part of the overall money market. This segment pertains to day-to-day funds requirements of banks. When one bank faces a temporary shortage of cash, it borrows from another bank that has surplus cash for a period of one or two days. Typically, banks borrow in the money market to fill gaps or temporary mismatches in funds. Besides this, banks also need to borrow funds to meet the CRR and SLR mandatory requirements. Loans made in the call money market are of very short-term, ranging from 1 day to 14 days. Money that is lent for one day, or on overnight basis, is known as call money. If funds are transacted for a period of 2-14 days, it is known as notice money.
WHY IS IT NEEDED?
Banks sometimes need to borrow funds to meet a sudden demand which may arise due to large outflows such as during festival season, or long holiday periods. Usually, liquidity tightens during a festive season as money in circulation increases. Similarly, if there are continuous bank holidays, cash supply at ATMs, for example, has to be taken care of. So, call money serves the purpose of maintaining short-term liquidity of banks.
WHAT IS ITS IMPACT?
Participants in call or notice money market currently include scheduled commercial banks (excluding Regional Rural Banks), co-operative banks (other than land development banks) and primary dealers. The interest paid on call money is called call rate. Eligible participants are free to decide on what the interest rates would be. It is very volatile, and can vary not only from day to day, but also hour to hour. On 1 November, for instance, the minimum rate was 0.50% and the maximum, 8%. On 22 October, a day before Diwali, the weighted average rate went as high as 8.75%—the highest since September this year.
There is an inverse relation between the rate of interest of call money and other securities such as commercial paper and certificates of deposit. When this rate increases, the other securities may become more attractive. Thus, movement of call rates, too, has an impact on policy rates.
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