Factors Influencing Call Money Market Rate

The National Stock Exchange (NSE) developed and launched the NSE Mumbai Inter bank Bid the (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) or the overnight money markets on June 15, 1998, NSE MIBID/ MIBOR are based on rates pooled by NSE from a representative panel of 31 banks/institutions/primary dealers. Currently, quotes are polled and processed daily by the exchange at 9:40 (IST) for the overnight rate and at 11:30 (IST) for the 14 day, 1 month, and 24 month rates. The rates pooled are then processed using the boost trap method to arrive at an efficient estimate of the references rates. This rate is used as a benchmark rate or majority of the deals stuck for floating rate debentures and term deposits. Benchmark is rate at which money is raised in financial markets. These rates are used in hedging strategies as reference points in forwards and swaps.

Reuters MIBOR (Mumbai Inter-bank Overnight Average) is arrived at by obtaining weighted average of call money transactions of 22 banks and other players.

MIBOR is a better official benchmark rate for interest rate swaps (IRs) and forward rate agreements (FRAs). MIBOR is transparent, market determined and mutually acceptable to counterparties as reference.

Call Rates Volatility:

In India, money and credit situation is subject to seasonal fluctuation every year. The volume of call money transactions and the amount as well as call rate levels characterize seasonal fluctuation/volatility. A decrease in the call/notice money requirements is greater in the slack season (mid-April to mid-October) than in the buy season (mid-October to mid-April).

Liquidity conditions: Liquidity conditions are governed by factors on both the demand and supply side of money. Liquidity conditions are governed by deposit mobilization, capital flows and reserve requirements on the supply side, and tax outflows, government borrowings programs, non-food credit off take and seasonal fluctuations on the demand side. When easy liquidity conditions prevail, call rates move around the Reserve Bank’s repo rate. During times of tight liquidity, call rates tend to move up towards the bank rate.

Reserve requirement prescriptions and stipulations regarding average reserve maintenance: A cut in CRR reduces call rates while an increase in CRR increases call rates. Moreover, banks do not plan the demand for funds to meet their reserve requirements which increase call rate volatility.

Till April 1997, inter-bank transactions were included in the reserve calculation. This led to a halt in money market activity every second Friday (reserve calculation day) when banks tried to reduce their reserve requirements by eliminating inter-bank borrowing. Due to this, the overnight call rates fell to zero per cent very second Friday. This inhibited the development of liquid money market yield curve beyond 13 days.

Structural factors: Structural factors refer to government legislation, conditions of the stock markets and so on which affect the volatility of the call money rate.

Investment policy of non-bank participants in the call market who are the major lenders of funds in the call market: money market is asymmetrical in the sense there are few lenders and chronic borrowers. This asymmetry leads to fluctuations in the call money market rate.

Liquidity changes and gaps in the foreign exchange market: Call rates increase during volatile forex market conditions. This increase is a result of monetary measures for tightening liquidity conditions and short position taken by market agents in domestic currency against long positions in US dollars in anticipation of higher profits through depreciation of the rupee. Banks fund foreign currency positions by withdrawing from the inter bank call money market which leads to a hike in the call money rates.