Have you ever wondered what is call money market and how it impacts the day-to-day functioning of banks and financial institutions?
The call money market is an essential part of the financial system that facilitates short-term borrowing and lending, usually for one day. This market plays a critical role in maintaining liquidity among banks and influencing the overall money supply in the economy.
In this detailed blog post, we will cover everything you need to know about the call money market, including how it works, who participates in it, its advantages and limitations, and its connection to the central bank’s monetary policies.
What is Call Money Market?
The call money market is a segment of the money market where short-term funds are borrowed and lent for one day. This market is also referred to as the overnight money market.
The term “call” signifies that the loan can be called back or demanded for repayment at any time, usually the next working day. It is used primarily by banks and financial institutions to manage their short-term liquidity requirements and comply with regulations such as the Cash Reserve Ratio (CRR).
Understanding what is call money market gives insight into how banks stay operational, solvent, and compliant with financial norms.
Key Features of the Call Money Market
Let’s look at the unique characteristics that define what is call money market:
Duration
- The funds are lent and borrowed for just one day.
- Repayment is due the next business day.
Unsecured Transactions
- Lending is without collateral, making it a high-trust market.
Participants
- Only certain financial institutions are allowed to participate.
- Involves both lenders and borrowers depending on liquidity needs.
Dynamic Interest Rate
- The interest rate is called the call rate.
- It fluctuates daily based on demand and supply of funds.
Who Participates in the Call Money Market?
Understanding what is call money market also involves knowing who can operate in this space. The market is mainly accessible to banks and approved financial institutions.
Borrowers:
- Commercial Banks: To meet CRR or manage temporary shortages.
- Co-operative Banks: Limited to borrowing only.
Lenders:
- Commercial Banks with surplus funds.
- Insurance Companies.
- Mutual Funds.
- Large Financial Institutions like NABARD, LIC, etc.
Only entities approved by the central bank (like RBI in India) can actively lend or borrow in the call money market.
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Functions and Importance of the Call Money Market
The call money market is not just a place for overnight transactions; it plays several vital roles in the financial system. Let’s understand the importance of the call money market:
1. Liquidity Management
It allows financial institutions to manage daily liquidity fluctuations, ensuring no bank runs out of money unexpectedly.
2. Meeting CRR Requirements
Banks are mandated to maintain a minimum balance with the central bank. If a bank falls short, it can borrow from the call money market to stay compliant.
3. Tool for Monetary Policy
The call rate serves as a strong indicator of the liquidity position in the banking system, influencing the central bank’s decisions on repo rates and other monetary tools.
4. Efficient Resource Utilization
Institutions with surplus funds can earn interest by lending, while those in need can borrow, promoting financial efficiency.
How the Call Money Market Works
To understand what is call money market, let’s break down the working process step by step:
Step 1: End-of-Day Assessment
Banks analyze their end-of-day positions to determine if they have surplus funds or a shortage.
Step 2: Entering the Market
- Deficit banks approach the market to borrow.
- Surplus banks or financial institutions come to lend.
Step 3: Deal Negotiation
Borrowing and lending are typically done without collateral, and the interest rate is negotiated, reflecting real-time liquidity.
Step 4: Repayment
The transaction is settled the next day, with the borrower returning the principal along with interest.
This daily cycle keeps the system running smoothly.
What is the Call Rate?
One cannot understand call money market without knowing about the call rate.
- The call rate is the interest rate charged on overnight loans.
- It changes daily depending on market conditions.
- High demand = Higher call rate
- High supply = Lower call rate
The call rate is a sensitive indicator of the country’s liquidity situation and is closely watched by investors, analysts, and the central bank.
Advantages of the Call Money Market
Here are the key benefits that highlight the relevance of call money market:
Provides Liquidity
The market enables banks to stay liquid, reducing the chance of default.
Quick Access to Funds
Funds are available almost instantly without collateral.
Indicator of Financial Health
The volatility of the call rate signals economic health and monetary conditions.
Cost-Effective
Banks can avoid penalties for CRR non-compliance by borrowing at reasonable rates.
Risks and Challenges in the Call Money Market
While the market has many benefits, it’s also essential to understand the limitations and risks:
High Volatility
Call rates can fluctuate significantly, impacting financial planning.
Limited Participation
Access is restricted to licensed and approved institutions only.
No Collateral
The unsecured nature increases the credit risk.
Systemic Risk
A large default can cause ripple effects across the entire banking system.
Role of the RBI
In India, the Reserve Bank of India (RBI) oversees and regulates the call money market.
Here’s how the RBI plays a crucial role:
- Monitors liquidity through the call rate.
- Implements monetary policy tools to stabilize the call rate.
- Conducts open market operations (OMO) to inject or absorb liquidity.
- Maintains overall financial stability by watching trends in the call money market.
Understanding call money market becomes clearer when you realize how deeply it’s tied to the central bank’s policy framework.
Types of Short-Term Money Markets (Comparison)
| Type | Duration | Notice | Collateral |
| Call Money | 1 Day (Overnight) | No | No |
| Notice Money | 2–14 Days | Yes | No |
| Term Money | 15+ Days | Yes | No |
This comparison helps distinguish what is call money market from other short-term financial instruments.
Real-Life Example
Let’s say Bank A ends its day with a ₹50 crore shortfall to meet the CRR. It enters the call money market and borrows from Bank B, which has a ₹100 crore surplus. The funds are lent for one day at a call rate of 5%. The next day, Bank A repays ₹50 crore plus ₹6.85 lakh as interest.
This simple mechanism keeps both banks functioning efficiently and ensures regulatory compliance.
FAQs About What is Call Money Market
Q1: What is the call money market in simple terms?
A: It’s a market where banks lend and borrow money for one day to manage their liquidity.
Q2: Who can participate in the call money market?
A: Commercial banks, co-operative banks, mutual funds, and insurance companies.
Q3: Why is it called “call” money?
A: Because the loan can be called back (repaid) the next day.
Q4: What is the difference between call money and notice money?
A: Call money is for 1 day, while notice money is for 2–14 days and requires advance notice before repayment.
Q5: Is collateral required?
A: No, call money transactions are typically unsecured.
Conclusion
By now, you should have a comprehensive understanding of call money market. It’s an integral part of the financial system that ensures liquidity, stability, and effective monetary control. Although it’s a high-trust, short-duration market, its impact on banking operations and economic indicators is significant.
From daily banking operations to central bank decisions, the call money market plays a silent yet powerful role in maintaining the rhythm of the financial world. If you’re a finance enthusiast, investor, or student, knowing what is call money market gives you a solid foundation in money market instruments and real-world financial operations