Call/notice money market

It is by far the most visible market as the day-to-day surplus funds, mostly of banks, are traded there. The call money market accounts for the major part of the total turnover of the money market. It is a key segment of the Indian money market. Since its inception in 1955-56, the call money market has registered a tremendous growth in volume of activity.

The call money market is a market for very short-term funds repayable on demand and with a maturity period varying between one day to a fortnight. When money is borrowed or lent for a day, it is known as call (overnight) money. Intervening holidays and/or Sundays are excluded for this purpose. When money is borrowed or lent for more than a day and up to 14 days, it is known as notice money. No collateral security is required to cover these transactions. The call money market is a highly liquid market, with the liquidity being exceeded only by cash. It is highly risky and extremely volatile as well.

Call money is required mostly by banks. Commercial banks borrow money from other banks to maintain a minimum cash balance known as cash reserve requirement. This inter-bank borrowing has led to the development of the call money market.

CRR is an important requirement to be met by all commercial banks. The Reserve Bank stipulates this requirement from time to time. The CRR is a technique monetary control affected by the Reserve Bank for achieving specific macro-economic objectives such as maintaining desired levels of inflation, growth, exchange rates, and so on. CRR refers to the cash that banks have to maintain with the Reserve Bank as s certain percentage of their total demand and time liabilities (DTL). The CRR, a primary instrument of monetary policy, has been brought down from 15% in March 1991 to 4.75% in October2002.

Prior to May 2000, banks were required to maintain 85% of their fortnightly reserve requirements on a daily basis. The networking among various branches of banks was not developed enough for the branches to report their respective net demand and time liabilities (NDTL) positions to the main branch on the first day of the fortnight itself. The NDTL of a bank is the sum of its liabilities to the banking system and its liabilities to the public.

With a view to providing further flexibility to banks and enabling them to choose an optimum strategy of holding reserves depending upon their intra-period cash flows, several measures were undertaken recently. In November 1999, a lagged reserve maintenance system was introduced under which banks were allowed to maintain reserve requirements on the basis of the last Friday of the second (instead of the first) preceding fortnight. From May6 2000 the requirement of minimum 85% of the CRR balance on the first 13days to be maintained on a daily basis was reduced to 65%. With effect from August 11, 2000, this was reduced to 50% for the first seven days of the reporting fortnight while maintaining the minimum 65% for the remaining seven days including the reporting Friday. The daily minimum CRR was reduced to enable the smooth adjustment of liquidity between surplus and deficit segments and better cash management to avoid sudden increase in overnight call rates.

Hence, once every fortnight on a ‘reporting Friday’ banks have to satisfy reserve requirements which often entails borrowing in the call/notice money market. It is a market in which banks trade positions to maintain cash reserves. It is basically an over the counter (OTC) market without the intermediation of brokers. Inter-bank trading accounts for more than 80% of total transactions.

Participants in the Call Money Market:

The call money market was predominantly an inter-bank market till 1971 when UTI and LIC were allowed to operate as lenders. Until March 1978, brokers were also allowed to participate in the call money market, who would effect transactions between lenders and borrowers for a brokerage. In the 1990s, the participation was gradually widened to include DFHI, STCI, GIC, NABARD, IDBI, money market mutual funds, corporates, and private sector mutual funds as lenders in this market.