- The call money market is a market for very short-term funds repayable on demands with a period varying between one day to a fortnight.
- It is the most viable market as the day-to-day surplus funds, mostly of banks are traded in this market.
- Call money market accounts for a major part of the total turnover of the money market.
Features of Call Money Market
- Call money market is also known as the “Notice Money” Market.
- The call money market is a highly liquid market.
- Call money market is highly risky and volatile.
- No security or collateral is required to cover the transactions in the call money market.
- It is basically an “Over-the-counter” market without the intermediation of brokers.
- The participants in the call money market are-scheduled commercial banks, non-scheduled commercial banks, foreign banks, state, district and urban cooperative banks, brokers and dealers in the securities market, and primary dealers.
Why Call Money
- Commercial banks mostly require call money. Commercial banks borrow money without collateral from other banks to maintain the reserve requirements i.e., the Cash Reserve Ratio (CRR).
- Once every fortnight banks have to satisfy the minimum reserve requirement which often entails borrowing in the call/notice money market.
- Call rate is the rate of interest paid on call loans, which is highly volatile.
- The volatility of call rate depends on the demand and supply of call loans.
- Call rate is inversely related to the short-term money market instruments. When call rate is very high, banks raise more funds through Certificate of Deposits and when call rate is low, banks fund commercial papers by borrowing from the call money market and earn profits through arbitrage between money market segments.
- Large issues of government securities affect call rate. When banks subscribe to large issues of government securities, call rates go up and vice versa.
- Liquidity conditions, reserve requirements, liquidity changes and gaps in the foreign exchange market also influence the call rate.