The Call money market is an important part of the Indian Money Market, where surplus funds are traded on a daily basis. The money market is a market for short-term financial assets that are money substitutes. The loans are traded in the call money market and have a short term duration ranging from 1 to 14 days. In this market, money lent for one day is known as "Call Money" and money lent for more than one day (but less than 15 days) is known as "Notice Money." Term money is money that has been lent for 15 days or more on the interbank market. In this article, let us see the meaning of call money, its features and functions and who can participate in the call money market.

What is Call Money?

• Call money, also known as "money at call," is a short-term financial loan that must be paid in full and immediately when the lender demands it.
• Unlike a term loan, which has a fixed maturity and payment schedule, call money does not have to adhere to a set schedule, nor does the lender have to provide any advance notice of repayment.
• Call money is any type of short-term, interest-bearing loan that the borrower must repay immediately if the lender demands it.
• Call money allows banks to earn interest on their excess funds, which is known as the call money rate (call loan rate/call rate).
• It consists of overnight money as well as money available on short notice for up to 14 days.
• The call money market primarily serves to rebalance banks' and other participants' short-term liquidity positions.

Features of Call Money

• A call money loan is a short-term, interest-bearing loan made by one financial institution to another financial institution.
• Because of the loan's short term, it does not have regular principal and interest payments, which longer-term loans may have.
• The call loan rate is the interest rate charged on a call loan between financial institutions.
• Brokers use call money as a short-term source of funding to keep margin accounts open for their customers who want to leverage their investments.
• The funds can be transferred quickly between lenders and brokerage houses. As a result, it is the second most liquid asset on a balance sheet, trailing only cash.
• If the lending bank calls the funds, the broker can issue a margin call, which typically results in the automatic sale of securities in a client's account (to convert the securities to cash) to repay the bank.
• The interest rate charged on loans used to purchase securities, known as margin rates, varies according to the call money rate set by banks.

Functions of Call Money

• The call money market is run by brokers who keep in touch with the city's banks and connect the borrowing and lending banks.
• The market's primary function is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary cash deficit.
• Call money is used to meet the day-to-day cash needs of banks. Banks that are short on cash borrow from other commercial banks for a period of 1-14 days.
• Call-money is the term used when a bank borrows money for a single day. Notice money is any money borrowed for more than one day but no more than 14 days.
• The call rate is the rate at which these transactions take place. As a result, banks use call money to fill temporary fund mismatches and maintain short-term liquidity. It is the focal point through which the RBI can influence interest rates.

Participants in Call Money Market

• Participants in the call money market include banks and other entities designated by the RBI.
• Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land Development Banks), and Primary Dealers (PDs) can participate in the call/notice money market as both borrowers and lenders.
• Payment banks are now permitted to participate in the Call Money Market as both lenders and borrowers under the new regulations.
• Because banks are the dominant participants in the Call Money Market, it is also known as the interbank call money market. Banks with excess funds will lend to other banks. Deficit banks in need of funds will buy it.

Conclusion

The call/notice money market is the most important segment of the Indian money market. While banks and primary dealers (PDs) can borrow and lend in this market, non-bank participants such as financial institutions, mutual funds, and select corporates can only lend. Though non-bank participants with current and SGL accounts with the RBI are permitted to engage in both repo and reverse repo, the ease of transactions as well as low transaction costs resulting from minimal documentation and same-day settlement of funds in the call/notice money market act as strong incentives for non-bank participants to prefer the latter over the former.

FAQs

MCQs

1. What is the typical maturity period of a call money loan?

A) 7 days
B) 15 days
C) 1 day
D) 30 days

2. What does a high call money rate indicate?

A) Surplus liquidity in the banking system
B) Liquidity shortage in the banking system
C) Reduction in interest rates
D) Increase in long-term lending

3. Which of the following is a key function of the call money market?

A) Providing long-term loans
B) Facilitating short-term liquidity adjustments for banks
C) Financing government infrastructure projects
D) Managing international trade payments

4. Which institution regulates the call money market in India?

A) SEBI
B) Ministry of Finance
C) Reserve Bank of India (RBI)
D) NABARD

5. Which of the following is a characteristic of call money loans?

A) Fixed long-term interest rates
B) Highly liquid and short-term nature
C) High risk of default
D) Restricted to government institutions

GS Mains Questions and Model Answers

Q1: Analyze the role of the call money market in the functioning of the banking system in India.

Answer: The call money market plays a crucial role in maintaining the liquidity of the banking system in India. It provides a platform for banks and financial institutions to lend and borrow short-term funds, typically on an overnight basis, to meet immediate liquidity requirements. This market helps banks manage their cash flows, especially when there are short-term mismatches between deposits and withdrawals.

The call money rate is a key indicator of liquidity conditions in the economy. A higher call money rate reflects liquidity shortages, while a lower rate indicates surplus liquidity. The Reserve Bank of India (RBI) closely monitors and influences the call money market through its monetary policy instruments, including repo and reverse repo rates, to ensure financial stability. Overall, the call money market facilitates efficient fund management within the banking sector, ensuring smooth operations and preventing liquidity crises.

Q2: Discuss the impact of call money rate fluctuations on the economy.

Answer: Fluctuations in the call money rate have a direct impact on the economy, particularly on the cost of short-term borrowing for banks. When the call money rate rises, it indicates a shortage of liquidity in the financial system, leading to higher borrowing costs for banks. This can, in turn, result in higher lending rates for consumers and businesses, potentially slowing down economic activity.

Conversely, when the call money rate is low, it suggests surplus liquidity, encouraging banks to lend more at lower interest rates, which can boost economic growth. The Reserve Bank of India (RBI) actively manages the call money rate as part of its monetary policy to control inflation, ensure adequate liquidity, and stabilize the economy. Therefore, call money rate fluctuations are a key indicator of overall economic conditions.

Q3: Evaluate the importance of the Reserve Bank of India’s role in regulating the call money market.

Answer: The Reserve Bank of India (RBI) plays a vital role in regulating the call money market to ensure the smooth functioning of the banking system and maintain financial stability. As the central bank, the RBI monitors liquidity conditions in the economy and adjusts key policy rates such as the repo and reverse repo rates to influence the call money rate.

By regulating the call money market, the RBI helps manage short-term liquidity mismatches among banks and financial institutions. This prevents liquidity crises, ensures the availability of funds for day-to-day operations, and maintains confidence in the financial system. The RBI’s interventions in the call money market are crucial for achieving monetary policy objectives, such as controlling inflation, fostering growth, and maintaining overall economic stability.

Previous Year Questions on Call Money

1. UPSC CSE Prelims 2020:

Question: Which of the following markets is associated with short-term borrowing and lending, typically on an overnight basis?

A) Call money market
B) Treasury bill market
C) Equity market
D) Foreign exchange market

Answer: A

Explanation: The call money market is associated with short-term borrowing and lending, usually for one day (overnight), and is primarily used by banks and financial institutions for liquidity management.

2. UPSC CSE Mains 2021 (GS Paper 3):

Question: "Examine the role of the call money market in maintaining liquidity in the banking system and how fluctuations in the call money rate affect the broader economy."

Answer: The call money market is essential for maintaining liquidity in the banking system by enabling banks to borrow and lend short-term funds on an overnight basis. This market ensures that banks with temporary liquidity shortfalls can access funds quickly, preventing disruptions in their operations. Fluctuations in the call money rate, which reflects the availability of liquidity, have broader economic implications. A high call money rate suggests liquidity shortages, leading to higher borrowing costs and reduced credit availability, which can slow economic growth. On the other hand, a low call money rate indicates surplus liquidity, promoting lending and stimulating economic activity. The Reserve Bank of India (RBI) regulates the call money market to ensure that the banking system remains stable and that liquidity levels are balanced to support the broader economy.