25135819 Call Money Market in India

7/29/2019 25135819 Call Money Market in India

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PRESENTED BY:

DIVYA BODDU(07) , AIKTA DUBE(08), MEGHRAJ GAWANDE(09),SAURABH GOSWAMI(10), HEMANT KALAMKAR(11), NAILESH

JACOB(09020242012)


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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 andmean the period from Saturday to the secondfollowing Friday, both days inclusive

"Bank or banking company" means a banking

company or a "corresponding new bank", "StateBank of India" or "subsidiary bank and includes a"co-operative bank"


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Scheduled bank means a bank included inthe Second Schedule of the Reserve Bank ofIndia Act, 1934

"Primary Dealer" means a financial institutionwhich holds a valid letter of authorization as aPrimary Dealer issued by the Reserve Bank, interms of the "Guidelines for Primary Dealersin Government Securities Market

"Capital Funds" means the sum of the Tier Iand Tier II capital as disclosed in the latestaudited balance sheet of the entity.


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The money market is a market for short-termfinancial assets that are close substitutes of money.

The most important feature of a money market instrumentis that it is liquid and can be turned over quickly at low cost

and provides an avenue for equilibrating the short-termsurplus funds of lenders and the requirements of borrowers.

The call/notice money market forms an important segmentof the Indian Money Market.

Under call money market, funds are transacted onovernight basis and under notice money market, funds aretransacted for the period between 2 days and 14 days.


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As per RBI definitions A market for short termsfinancial assets that are close substitute formoney, facilitates the exchange of money in

primary and secondary market.

The money market is a mechanism that dealswith the lending and borrowing of short termfunds (less than one year).

A segment of the financial market in whichfinancial instruments with high liquidity and veryshort maturities are traded.


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Money Market consists of a number of sub-markets which collectively constitute the

money market. They are, Call Money Market Commercial bills market or discountmarket Acceptance market Treasury bill market


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The call money is the money lent for one day Deals with overnight borrowing and lending

The funds located through the money market can be utilized

To provide financing for the purchase of securities that can beadded to the portfolio of the investment firm

As a resource that will cover the margin accounts of thefirms clients.


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Helps Bank to manage short-term deficit or surplus ofmoney

Provides funds that can be used to conduct transactionsbetween banks, or with other money market dealers

The call money loan essentially works in the samemanner as a day to day loan

Crosses international lines, with funding

opportunities located around the world


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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 Rs60,000 million to Rs 70,000 million

Of which public sector banks account for 80% of borrowings

Foreign banks/private sector banks account for the balance20%.


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The money market is a market for short-term financial assetsthat are close substitutes of money.

It is liquid and can be turned over quickly at low cost. Provides an avenue for equilibrating the short-term 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


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Banks borrow in this money market for the followingpropose.

To fill the gaps or temporary mismatches in funds

To meet the CRR & SLR Mandatory requirements asstipulated by the Central bank

To meet sudden demand for funds arising out of largeoutflows

Thus call money usually serves the role ofequilibrating the short-term liquidity position of banks


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The call money market for India was first recommended by theSukhumoy Chakravarty

Committee, was set up in 1982 to review the working of themonetary system.

They felt that allowing additional non-bank participants intothe call market would not dilute the strength of monetaryregulation by the RBI, as resources from non-bank participantsdo not represent any additional resource for the system as awhole, and their participation in call money market would onlyimply a redistribution of existing resources from oneparticipant to another.

In view of this, the Chakravarty Committee recommendedthat additional nonbank participants may be allowed toparticipate in call money market


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The Vaghul Committee (1990), while recommending theintroduction of a number of money market instruments tobroaden and deepen the money market, recommended thatthe call markets should be restricted to banks.

The other participants could choose from the new moneymarket instruments, for their short -term requirements.

One of the reasons the committee ascribed to keeping thecall markets as pure inter-bank markets was the distortions

that would arise in an environment where deposit rates wereregulated, while call rates were market determined


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The Narasimham Committee II (1998) alsorecommended that call money market in India,like in most other developed markets, shouldbe strictly restricted to banks and primary

dealers.

Since non- bank participants are not subject toreserve requirements, the Committee felt thatsuch participants should use the other moneymarket instruments, and move out of the callmarkets


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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


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Those who can both borrow and lend in the market RBI (through LAF), banks and primary dealers

Once upon a time, select financial institutions viz.,IDBI, UTI, Mutual funds were allowed in the callmoney market only on the lenders side

These were phased out and call money market isnow a pure inter-bank market (since August 2005)


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From May 1, 1989, the interest rates in the call and the noticemoney market have been market determined.

Interest rates in this market are highly sensitive to the demand -supply factors.

Within one fortnight, rates are known to have moved from a lowof 1 - 2 per cent to dizzy heights of over 140 per cent per annum.

Large intra-day variations are also not uncommon.


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Scheduled commercial banks: On a fortnightlyaverage basis, borrowing outstanding shouldnot exceed 100 per cent of capital funds.However, banks are allowed to borrow a maximum of 125

% of their capital funds on any day, during a fortnight.

Co-Operative Banks: Banks on a daily basis should notexceed 2.0 per cent of their aggregate deposits as at endMarch of the previous financial year

Primary Dealers: PDs are allowed to borrow, on average ina reporting fortnight, up to 200 per cent of their net ownedfunds (NOF) as at end-March of the previous financial year.


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Scheduled Commercial Banks: On afortnightly 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 25per cent of their NOF

Non-bank institutions are not permitted in the call moneymarket with effect from August 6, 2005.


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This is the interest rate charged bybanks to brokers for money used tofinance investors' margin loans.

Eligible participants are free todecide on interest rates in callmoney market.

This is the benchmark rate for whatinvestors pay to buy securities onmargin.

A service charge or markup istypically added by the broker.


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Borrowers and lenders contact each other over telephone.

The borrowers and lenders arrive at a dealspecifying the amount of loan and the rate of interest.

After the deal is over, the lender issues FBL cheque in favour ofthe borrower.

The borrower in turn issues call money borrowing receipt.

When the loan is repaid with interest, the lender returns thedulydischarged receipt.


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The deal can be directly negotiated by routing it through the Discountand Finance House of India (DFHI).

The borrowers and lenders inform the DFHI about their fundrequirement and availability at a specified rate of interest.

Once the deal is confirmed, the Deal Settlement Advice is exchanged.In case the DFHI borrows, it issues a call deposit receipt to the lender

and receives RBI cheque for the money borrowed. The reverse takesplace in the case of lendings by the DFHI.

The duly discharged call deposit receipt is surrendered at the time ofsettlement.

Call loans can be renewed upto a maximum period of 14 days only andsuch renewals are recorded on the back of the deposit receipt by the borrower.


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The entry into this field is restricted by RBI.

Commercial Banks, Co-operative Banks and Primary Dealersare allowed to borrow and lend in this market.

Specified All-India Financial Institutions, Mutual Funds, andcertain specified entities are allowed to access to Call/Noticemoney market only as lenders.

Reserve Bank of India has recently taken steps to make thecall/notice money market completely inter-bank market.

Hence the non-bank entities will not be allowed access tothis market beyond December 31, 2000


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Both the borrowers and the lenders are required to have currentaccounts with the Reserve Bank of India.

This will facilitate quick and timely debit and credit operations.

The call market enables the banks and institutions to even out their

day to day deficits and surpluses of money.

Banks especially access the call market to borrow/lend money foradjusting their cash reserve requirements (CRR).

The lenders having steady inflow of funds (e.g. LIC, UTI) look at thecall market as an outlet for deploying funds on short term basis.


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There must be not only an outlet for the employment of fundstemporarily idle, but a large volume of call and short-time money isessential to the successful and economical conduct of business.

It is particularly essential to the international and domesticcommercial business, but the diversion of the use of the majorportion 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 nowbeen more generally taken into consideration by our lenders.

But the safe and successful divorce in this country of the use of callmoney from dependence upon investment securities as a basis

requires careful study in order that safe and adequate methodsmay be substituted for the present methods of the securitiesmarket.

Call money market serves the role of equilibrating the short-termliquidity position of the banks

IMPOR

TANC

E


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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 vibrantinstitution

Its a part of the organized money market


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The simple logicbehind a pure inter-bank call money

market is that it allowsthe central bank moreflexibility in managingliquidity and short-

term interest rates inthe banking system


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Deals in thecall/notice moneymarket can be done

up to 5.00 pm onweekdays and 2.30pm on Saturdays oras specified by RBI

from time to time


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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 counterpartyis a member of the NDS or not.

In case there is repeated non-reporting of deals by an NDSmember, it will be considered whether non-reported deals bythat member should be treated as invalid.

The reporting time on NDS is upto 5.00 pm on weekdays and2.30 pm on Saturdays or as decided by RBI from time to time.


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With the stabilization of reporting of call moneytransactions over NDS as also to reduce reportingburden, the practice of reporting of call moneytransactions by fax has been discontinued.

Deals between non-NDS members will continue tobe reported to the Financial Markets Department(FMD) of RBI by fax as hitherto.

In case the situation so warrants, Reserve Bank maycall for information in respect of money markettransactions of eligible participants by fax


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To commercial banks to meet large payments,large remittances, to maintain liquidity with the RBIand so on.

To the stock brokers and speculators to deal instock exchanges and bullion markets

To the bill market for meeting matured bills.

To the Discount and Finance House of India and theSecurities Trading Corporation of India to activatethe call market.

To individuals of very high status for tradepurposes to save interest on O.D. or cash credit


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High LiquidityHigh Profitability

Maintenance of SLR

Safe and cheap

Assistance to central bank operations


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Uneven DevelopmentLack of Integration

Volatility in Call Money rates


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The withdrawal of non-bank entities fromthe inter-bank call-money market is linkedto the improvement of settlementsystems.

Any time-bound plan for the evolution ofa pure inter-bank call/notice moneymarket would be ineffective till the basic

issue of settlements is addressed.


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25135819 Call Money Market in India

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