Call money refers to unsecured overnight borrowing and lending between institutionss permitted by the Reserve Bank of India (RBI). Eligible banks and primary dealers generally use it to cover temporary cash shortfalls or deploy surplus funds overnight. By moving funds between institutions with a shortfall and those with a surplus, the call money market supports day-to-day liquidity in the banking system.
Table of Contents
Call money market meaning
Under RBI rules, call money specifically means unsecured funds borrowed or lent overnight. The lender transfers the funds on the value date, and the borrower repays the principal along with interest on the agreed due date after the overnight tenure.
Call money is generally used to manage temporary liquidity gaps arising from daily payments, withdrawals, settlements or reserve requirements. Funds borrowed for more than one day and up to 14 days are classified as notice money, not call money.
Key aspects of call money
The main features of call money are:
- Overnight tenure: A call money transaction is for an overnight period. It does not extend for up to 14 days.
- Unsecured borrowing: The borrower does not provide collateral against the funds.
- Market-determined rate: Eligible participants agree on the interest rate. It may vary across transactions and trading days based on the demand for and supply of short-term funds.
- Liquidity management: Institutions use call money to manage temporary cash shortages or overnight surpluses.
- Limited participation: Only institutions permitted under RBI rules can directly transact in the market.
- Regulated transactions: Deals must follow RBI requirements relating to trading, reporting and prudential limits.
How call money works
A call money transaction usually works as follows:
- A temporary need arises: An eligible institution may have a cash shortfall because of withdrawals, payments, settlements or reserve requirements. Another institution may have surplus cash.
- The institutions agree on a rate: The borrower and lender agree on the amount and the overnight interest rate. The deal may take place through NDS-CALL, another authorised electronic trading platform or the over-the-counter market.
- The funds are transferred: The lender transfers the agreed amount to the borrower on the value date.
- Repayment takes place: The borrower repays the principal and the applicable interest on the agreed due date after the overnight tenure.
- The transaction is reported: Call money transactions must be reported in line with RBI requirements.
Call money vs notice money vs term money: Key differences
The main difference between call money, notice money and term money is the period for which funds are borrowed or lent:
| Basis | Call money | Notice money | Term money |
| Tenure | Overnight | More than overnight and up to 14 days | More than 14 days and up to one year |
| Security | Unsecured | Unsecured | Unsecured |
| Interest rate | Market-determined | Market-determined | Market-determined |
| Typical use | Overnight liquidity needs | Liquidity needs lasting a few days | Short-term funding needs lasting more than 14 days |
| Repayment | On the agreed overnight due date | On the agreed due date | On the agreed maturity date |
Interest rate in the call money market
The call money rate is the annualised interest rate charged on unsecured overnight funds. Eligible participants are free to agree on the rate, which may vary across transactions and trading days depending on the demand for and supply of short-term funds. The weighted average call rate, or WACR, represents the weighted average rate across call money transactions. It is the operating target of the RBI’s monetary policy framework.
Call money rate vs repo rate: How do they differ?
The call money rate and the policy repo rate are both connected to overnight liquidity, but they represent different things:
| Basis | Call money rate | Policy repo rate |
| Meaning | Annualised interest rate on unsecured overnight call money transactions | Monetary policy rate decided by the Monetary Policy Committee |
| How it is determined | Agreed between eligible participants based on market conditions | Set by the Monetary Policy Committee |
| Nature | A market-determined rate arising from actual transactions | A policy rate that anchors short-term interest rates |
| Collateral | Call money transactions are unsecured | Repo transactions used to provide liquidity are backed by eligible securities |
| Role | The WACR reflects overnight liquidity conditions and is the RBI’s operating target | The RBI manages liquidity with the aim of aligning the WACR with the policy repo rate |
The call money rate may move above or below the policy repo rate depending on liquidity conditions. Therefore, the two rates are related but are not necessarily identical.
Role of RBI in the call money market
The RBI regulates the call money market and influences the amount and cost of overnight liquidity in the banking system. Its main functions include:
- Deciding which institutions may participate in the market.
- Prescribing prudential limits and reporting requirements.
- Monitoring call money transactions and publishing market data.
- Conducting liquidity operations to inject or absorb funds from the banking system.
- Using the WACR as the operating target of monetary policy.
- Managing the policy corridor, with the Standing Deposit Facility rate forming the floor and the Marginal Standing Facility rate forming the ceiling under the current framework.
The RBI does not decide the rate for individual call money transactions. The rate is agreed upon by eligible market participants and moves with market liquidity.
Participants in the call money market
Under the RBI directions currently in force, the following entities may participate as borrowers and lenders:
- Scheduled commercial banks, excluding Local Area Banks
- Payment banks
- Small finance banks
- Regional rural banks
- State co-operative banks
- District central co-operative banks
- Urban co-operative banks
- Primary dealers
The RBI regulates the market and manages system liquidity, but its liquidity facilities are separate from ordinary call money transactions. NBFCs that are not authorised primary dealers, housing finance companies, mutual funds and retail investors are not included in the current list of eligible participants. An NBFC authorised by the RBI as a primary dealer can participate in that capacity.
Advantages of call money
Call money can help eligible institutions manage very short-term liquidity in several ways:
- Quick access to funds: An institution can meet an overnight shortfall without arranging longer-term borrowing.
- Use of surplus cash: A lender can deploy funds that may otherwise remain unused overnight and receive interest.
- No collateral requirement: Since the transaction is unsecured, the borrower does not need to pledge securities.
- Support for daily operations: The funds may be used to meet payment, settlement and reserve-related requirements.
- Monetary policy transmission: Movements in the call rate help transmit changes in the RBI’s policy rate through the financial system.
Disadvantages and risks of call money
Call money is useful for short-term liquidity management, but it also has certain limitations and risks:
- Interest rate volatility: Call rates can rise when liquidity in the banking system becomes tight.
- Refinancing risk: Institutions that depend heavily on overnight borrowing may face difficulty if funds become less readily available.
- Counterparty risk: Since the lending is unsecured, the lender faces the risk that the borrower may not repay the amount. However, participation is restricted to regulated institutions.
- Uncertain borrowing cost: The rate is not fixed for future transactions and may change from one day to another.
- Limited access: Retail investors, most companies and several types of financial institutions cannot participate directly.
Example of a call money transaction
Suppose Bank A borrows ₹100 crore overnight from Bank B at an annualised call rate of 6%. For a transaction with an actual tenure of one day, the interest would be calculated as follows:
Interest = ₹100 crore x 1 x 6 / (365 x 100)
The interest would be approximately ₹1,64,384, rounded to the nearest rupee. On the due date, Bank A would repay the ₹100 crore principal along with the interest.
The figures shown are for illustrative purpose only
Significance of call money for mutual funds
Under the RBI directions currently in force, mutual funds are not listed as direct participants in the call money market. However, call money rates can still be relevant to liquid funds and other short-duration debt schemes because they reflect overnight liquidity and monetary conditions in the financial system.
Changes in very short-term interest rates may influence the yields and valuations of other money market instruments held by these schemes. The effect on a scheme’s potential returns depends on its portfolio and prevailing market conditions.
Conclusion
Call money is unsecured overnight borrowing and lending between institutions permitted by the RBI. It helps eligible participants manage temporary cash shortages and surpluses. Call money should not be confused with notice money, which covers tenures beyond overnight and up to 14 days, or term money, which covers more than 14 days and up to one year. The call money rate is determined by market conditions, while the policy repo rate is decided by the Monetary Policy Committee.
FAQs
What is call money, and how does it work?
Call money is unsecured overnight borrowing and lending between institutions permitted by the RBI. The lender transfers the funds on the value date, and the borrower repays the principal along with interest on the agreed due date after the overnight tenure.
What is the difference between call money and notice money?
Call money is borrowed or lent overnight. Notice money has a tenure beyond overnight and up to 14 days. Both are unsecured, but their tenures are different.
Is call money the same as money at call and short notice?
No. Under current RBI market definitions, call money refers only to unsecured overnight funds, while notice money covers tenures beyond overnight and up to 14 days. “Money at call and short notice” is a broader expression used in certain banking and accounting contexts, so it should not be treated as an exact synonym for call money.
What is the tenure of call money loans?
Call money has an overnight tenure. The funds are transferred on the value date and repaid with interest on the agreed due date after the overnight period.
Are call money transactions secured or unsecured?
Call money transactions are unsecured. This means the borrower does not provide collateral to the lender.
Who participates in the call money market?
Participants permitted under current RBI directions include eligible commercial banks, payment banks, small finance banks, regional rural banks, specified co-operative banks and primary dealers. Participation is subject to applicable prudential limits.
Can retail investors participate in the call money market?
No. Retail investors cannot directly borrow or lend in the call money market. Participation is limited to institutions permitted by the RBI.
How is the call money rate different from the repo rate?
The call money rate is a market-determined rate for unsecured overnight transactions between eligible participants. The policy repo rate is decided by the Monetary Policy Committee and acts as an anchor for short-term interest rates.
How does the RBI regulate the call money market?
The Reserve Bank of India influences the call money market through its monetary policy operations. By controlling liquidity in the banking system, the RBI affects the availability and cost of short-term funds, thereby guiding call money transactions and interest rates.
What factors influence interest rates in the call money market?
Call money interest rates depend on several factors, such as the supply and demand for short-term funds, banks’ liquidity requirements, RBI’s monetary policy actions, market expectations, and overall economic conditions
What is the call money rate in India?
The call money rate in India is the annualised interest rate charged on unsecured overnight funds in the call money market. It may vary across transactions and trading days based on system liquidity and the demand for and supply of short-term funds.
What are the risks of call money?
The main risks include changes in interest rates, difficulty in obtaining funds during periods of tight liquidity and counterparty risk because the lending is unsecured. Heavy dependence on overnight borrowing can also make an institution more vulnerable to daily changes in funding conditions.
