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DEFINITIONS
Call Money" means deals in overnight funds "Notice Money" means deals in funds for 2 - 14 days "Fortnight" shall be on a reporting Friday basis and mean the period from Saturday to the second following Friday, both days inclusive "Bank or banking company" means a banking company or a "corresponding new bank", "State Bank of India" or "subsidiary bank and includes a "cooperative bank"
definitions CONTD.
Scheduled bank means a bank included in the Second Schedule of the Reserve Bank of India Act, 1934 "Primary Dealer" means a financial institution which holds a valid letter of authorization as a Primary Dealer issued by the Reserve Bank, in terms of the "Guidelines for Primary Dealers in Government Securities Market "Capital Funds" means the sum of the Tier I and Tier II capital as disclosed in the latest audited balance sheet of the entity.
INTRODUCTION
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.
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As per RBI definitions A market for short terms financial assets that are close substitute for money, facilitates the exchange of money in primary and secondary market. The money market is a mechanism that deals with the lending and borrowing of short term funds (less than one year).
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. HABA5BGBDDNGDD 2
MONEY MARKET
FINANCIAL MARKETS
MONEY MARKET
CAPITAL MARKET
Why???
Helps Bank to manage short-term deficit or surplus of money Provides funds that can be used to conduct transactions between banks, or with other money market dealers The call money loan essentially works in the same manner as a day to day loan Crosses international lines, with funding opportunities located around the world
MARKET SIZE
Market for very short term funds, known as money on call
The rate at which funds are borrowed in this market is called `Call Money rate'
The size of the market for these funds in India is between Rs 60,000 million to Rs 70,000 million Of which public sector banks account for 80% of borrowings
The money market is a market for short-term financial assets that are close substitutes of money. It is liquid and can be turned over quickly at low cost. Provides an avenue for equilibrating the shortterm surplus funds of lenders and the requirements of borrowers. The call money market forms an important segment of the Indian money market. Under call money market, funds are transacted on overnight basis
Insights CONTD.
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
Committee, was set up in 1982 to review the working of the monetary system.
They felt that allowing additional non-bank participants into the call market would not dilute the strength of monetary regulation by the RBI, as resources from non-bank participants do not represent any additional resource for the system as a whole, and their participation in call money market would only imply a redistribution of existing resources from one participant to another. In view of this, the Chakravarty Committee recommended that additional nonbank participants may be allowed to participate in call money market 4
One of the reasons the committee ascribed to keeping the call markets as pure inter-bank markets was the distortions that would arise in an environment where deposit rates were regulated, while call rates were market determined
FEATURES
Affected by liquidity in the market One of the segments of the money market No physical address Interest rates undergo a change on a day to day basis RBI has prescribed prudential limits for banks Transactions not secured by any collateral
Call Money Market Participants in the market Those who can both borrow and lend
RBI (through LAF), banks and primary dealers Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lenders side These were phased out and call money market is now a pure inter-bank market (since August 2005) . The participants in this market can be classified into categories viz. Those permitted to act as both lenders and borrowers of call loans. Those permitted to act only as lenders in the market. The first category includes all commercial banks. Cooperative banks, DFHI and STCI. In the second category LIC, UTI, GIC, IDBI, NABARD, specified mutual funds etc., are included. They can only lend and they cannot borrow in the call market.
LENDING
Scheduled Commercial Banks: On a fortnightly average basis, lending outstanding should not exceed 25% of their capital funds; however, banks are allowed to lend a maximum of 50 % of their capital funds on any day, during a fortnight Co-Operative Banks: No Limits Primary Dealers: PDs are allowed to lend in call money market, on average in a reporting fortnight, up to 25 per cent of their NOF Non-bank institutions are not permitted in the call money market with effect from August 6, 2005.
INTEREST RATE
This is the interest rate charged by banks to brokers for money used to finance investors' margin loans.
Eligible participants are free to decide on interest rates in call money market.
This is the benchmark rate for what investors pay to buy securities on margin. A service charge or markup is typically added by the broker.
The borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest.
After the deal is over, the lender issues FBL cheque in favour of the borrower.
When the loan is repaid with interest, the lender returns the duly discharged receipt.
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ENTRY BARRIER
The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken steps to make the call/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed access to this market beyond December 31, 2000
There must be not only an outlet for the employment of funds temporarily idle, but a large volume of call and short-time money is essential to the successful and economical conduct of business. It is particularly essential to the international and domestic commercial business, but the diversion of the use of the major portion of such money to the securities markets is not in accordance with sound banking principles. In India call loans on securities lack the essential quality of liquidity required for quick and certain realization, and that this fact has now been more generally taken into consideration by our lenders. But the safe and successful divorce in this country of the use of call money from dependence upon investment securities as a basis requires careful study in order that safe and adequate methods may be substituted for the present methods of the securities market.
IMPORTANCE Contd.
Call money market serves the role of equilibrating the short-term liquidity position of the banks Most active segment of money market
Day to day imbalances in the funds position of commercial scheduled banks is eased out
Graduated into a broad and vibrant institution Its a part of the organized money market
DEALING SESSIONS
Deals in the call/notice money market can be done up to 5.00 pm on weekdays and 2.30 pm on Saturdays or as specified by RBI from time to time
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REPORTING REQUIREMENT
All dealings do not require separate reporting It is mandatory for all Negotiated Dealing System (NDS) members to report their deals on NDS. Deals should be reported within 15 minutes on NDS, irrespective of the size of the deal or whether the counterparty is a member of the NDS or not. In case there is repeated non-reporting of deals by an NDS member, it will be considered whether non-reported deals by that member should be treated as invalid.
The reporting time on NDS is upto 5.00 pm on weekdays and 2.30 pm on Saturdays or as decided by RBI from time to time.
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