What is Call Money?
Call money is a short-term, interest-paying loan from one to 14 days made by a financial institution to another financial institution. Due to the short term nature of the loan, it does not feature regular principal and interest payments, which longer-term loans do.
Brokerages use call money as a short-term origin of funding to support margin accounts for the interest of their customers who wish to leverage their investments. The funds can shift quickly between lenders and brokerage firms. For this purpose, it is the second most liquid asset that arises on a balance sheet behind cash.
(Image will be Uploaded soon)
What is "Money Market"?
To simplify, money market basically refers to a division of the financial market where financial instruments with high liquidity and short-term maturities are purchased and sold. The participants use it as a way of borrowing and lending for the short term. One of the key elements of the Indian financial markets is the call money market, in which surplus funds (mostly from financial institutions) are traded on a regular schedule.
What is the Call Money Market?
The call money market is an important aspect when there is a surplus of funds in the Indian equity market (mainly from banks) that are sold on a daily basis. The capital market is a market for relatively short-lived capital instruments that can be used as money substitutes. First, the most important feature of a money market is that it is flexible and can be converted into fast cash, even at a relatively cheap price. It also helps to balance lenders' ability to quickly save money by meeting the needs of their customers.
The call money market, as an important element of the financial markets, has a few distinctive features: Call currency is a chargeable asset for sleek financial services.
Because it is essentially a "cell phone" industry, it is logistically simple when both mortgage companies and borrowers manage it.
The best thing is that it offers extra capital and contributes to the growth of a financial statement as a debt restructuring tool.
A constant call money rate helps to smooth out fluctuations in a group's liquid assets from a global perspective, contributing to the financial application's viability. In exchange, a stable macroeconomy serves as a reliable financial services authority or standard-setter. On the local scale, short-term borrowing by institutions enhances the effectiveness of personal finance in two directions. In one sense, call money rate permits banks to maintain a higher repo rate than would otherwise be possible. Call money rate also allows certain financial institutions to raise their amount of diverse money through an additional approach on a long-term premise.
As a result, a dynamic and competitive call money rate enhances corporations' public spending expenditures and increases their total productivity and competitiveness.
Call Money Market Features
The following are some of the most important characteristics of a money market:
In summary, a money market is basically a form of financing. Monetary market sales include short-term capital loans and also the payment of cash for a specific period of time that is available (repaid in full) in just one year.
The Call Money Market Features are as Follows:
It is a relatively new industry.
There is no set global position.
Commercial banks, finance companies, insurance, and other large organizations active in the financial markets.
This market offers overnight funds to 14 days funds.
The important feature of this market is that the borrower has to return the money when called by the lender.
Money at Call and Short Notice
Money at call and short notice is a part of the call money market. Cash borrowed for one day can be referred to as "call money." This refers to nighttime cash, as opposed to the currency that is loaned for more days and is known as "short notice money." To simple words, money at call and short notice refers to the time when lending company received no collateral for the amount loaned on a specific timeline or on call
Regulated financial institutions (except RRBs), cooperative banks, and last but not least, principal distributors (PDs) are all the participants of call money market in the call and notice money market, acting as both borrowers and lenders.
What is a Call Money Rate?
The call money rate is said to be a rate at which funds for very short term are traded or lended in the money market. It is a kind of financial loan at a particular rate which has to be returned to the lender by the borrower when demanded by him.
Benefits of the Call Money Market
Now let's look at some of the advantages of call money market, which are as follows:
Because lending expenses are more volatile in this sector, they can be returned.
It is conceivable to have financial intermediaries and transfer funds.
It provides a lucrative space for the leftover money.
It helps the institutions such as commercial banks to fulfill their RBI reserve requirements whenever there is a shortage of money.
It aids the management in collecting fairly small sums of money.
Because the members possess a great reputation and the calls are safe.
It's indeed beneficial to the actions of central banks.
Money Market's Disadvantages
The Disadvantages of Call Money Market are as Follows:
It is only found in major industrial and commercial areas.
The call money markets are just not combined.
There's also the issue of money market rates being variable.
Who is involved in the call money market? Is an important thing to know.
The lender can ask for his amount anytime.
Fun Facts
Extensive Liquidity
Loans given in a call marketplace are very flexible because they can be summoned back at any time when necessary. It allows the banking sector to meet large, unexpected repayments and transfers by placing a market call.
Cash Flow is Great
Bankers can make a lot of money by providing extra cash to the call market while interest rates increase and are quite erratic. It provides a lucrative space for the cash inflows of the banks to be momentarily employed.
Conclusion
The money market consists of negotiable instruments such as commercial papers, treasury bills, and certificates of deposit. It is used by numerous participants, including firms, to allocate funds by selling commercial papers in the market. The money market is considered a secure place to invest due to the high liquidity of securities. It has certain risks that investors should know, but it is the best source to invest in liquid assets.
FAQs on Call Money Market: Explained
1. What exactly is the call money market?
The call money market is a segment of the money market where banks and financial institutions lend and borrow funds for a very short period, typically ranging from one day to a maximum of fourteen days. These loans are 'on call', meaning the lender can demand repayment at any time. It primarily helps banks manage their day-to-day cash requirements.
2. What are the main features of the call money market?
The call money market has several distinct features that make it unique:
- Short-Term Maturity: Transactions are extremely short-term, usually for one day (overnight).
- High Liquidity: Funds are readily available and can be accessed quickly.
- No Collateral: Loans are typically unsecured, based on the trust between participating institutions.
- Volatile Interest Rates: The interest rate, known as the call rate, can change rapidly based on the demand and supply of money.
- Key Participants: It is dominated by commercial banks, with the RBI playing a major regulatory role.
3. Why do banks need to borrow from the call money market?
Banks must maintain a certain percentage of their deposits as a Cash Reserve Ratio (CRR) with the Reserve Bank of India (RBI). If a bank faces a temporary shortfall in its reserves on any given day, it borrows from other banks with surplus funds through the call money market. This allows them to meet their reserve requirements without any penalty.
4. How does the call money market work? Can you give an example?
Imagine Bank A has surplus cash of ₹500 crores at the end of the day, while Bank B is short by ₹500 crores to meet its CRR. Bank B can borrow this amount from Bank A for one day in the call money market. The interest that Bank B pays to Bank A for this overnight loan is called the call money rate. The next day, Bank B repays the amount to Bank A.
5. Who are the main participants in the Indian call money market?
The primary participants in the call money market in India are commercial banks. Other entities like cooperative banks and primary dealers (PDs) are also permitted to participate, but mainly as lenders. The Reserve Bank of India (RBI) acts as a regulator and influences the market through its monetary policy actions.
6. Is the call money market the same as the share market?
No, they are completely different. The call money market is part of the money market, which deals with short-term borrowing and lending for periods of less than a year. In contrast, the share market is part of the capital market, which focuses on raising long-term funds through the buying and selling of stocks (shares) and bonds.
7. What is the 'call rate,' and what makes it change so often?
The 'call rate' is the interest rate at which funds are borrowed and lent in the call money market. It is highly volatile because it is determined by the real-time demand and supply of short-term funds in the banking system. During periods of tight liquidity (when many banks need cash), the call rate goes up. When there is excess cash in the system, the call rate falls.
8. How does the Reserve Bank of India (RBI) influence the call money market?
The RBI influences the call money market primarily through its monetary policy tools. By changing key rates like the repo rate, it makes borrowing from the RBI cheaper or more expensive for banks. The RBI also conducts Open Market Operations (OMOs) to buy or sell government securities, which either injects or absorbs cash from the banking system, directly impacting liquidity and the call rate.
