What is call money?

Call money refers to short-term lending and borrowing between banks and other financial institutions in the Indian money market. It allows banks and financial institutions to meet their short-term fund requirements and manages daily liquidity in the banking system.

Call money definition

The call money meaning, as the name suggests, refers to funds that can be ‘called back’ by the lending bank at very short notice, usually one day. It involves overnight lending and borrowing of funds between banks, financial institutions, and the central bank. Essentially, call money can be considered as a very short-term loan with no set principal or interest repayment timelines.

The key aspects of call money are detailed below.

Tenure: Call money transactions have an extremely short maturity period, usually overnight or for a maximum of 14 days.

Notice period: The lending bank has the right to ‘call back’ the funds at any time during the day by giving a very short notice, usually one day.

Interest rate: Interest rates on call money fluctuate daily based on market conditions and are decided through open market operations conducted by the central bank.

Participating entities: Banks, financial institutions, cooperative banks, and the central bank participate in call money lending and borrowing.

Purpose: It helps banks and financial institutions meet temporary mismatches in their daily cash flow and fund requirements.

Role of RBI in call money market

As the central bank and lender of last resort in the Indian economy, the Reserve Bank of India (RBI) plays a pivotal role in regulating and managing liquidity in the call money market. Some of the key functions of RBI include the below.

• Conducting daily open market operations (OMOs) like repo and reverse repo auctions to inject or absorb liquidity. This influences call rates.
• Acting as a counterparty for banks by providing liquidity support through tools like liquidity adjustment facility (LAF).
• Announcing daily MSF and bank rate that acts as caps and floors for overnight call rates.
• Monitoring market conditions and ensuring adequate liquidity to mitigate volatility in short-term rates.
• Collecting and publishing daily call money rates to ensure transparency in the system.
• Issuing guidelines on reserve requirements and statutory liquidity ratio to influence bank liquidity.

This helps maintain relative stability in short-term interest rates and financial stability of the overall banking system.

Participants in call money market

Scheduled commercial banks: Both public and private sector banks actively participate in call money lending and borrowing based on their daily liquidity positions.

Cooperative banks: Urban cooperative banks and district central cooperative banks also access call money market for liquidity management.

Financial institutions: Non-banking financial companies (NBFCs), housing finance companies, and mutual funds participate to manage temporary cash flow issues.

RBI: As the lender of last resort, RBI conducts liquidity operations like repo, reverse repo and LAF to regulate liquidity in the system.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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