CONSTITUENTS OF THE MONEY MARKET
The money market is composed of several financial
agencies that deal with different types of short term
credit. Money market instruments take care of the
borrowers' short-term needs and render the
required liquidity to the lenders. The varied types of
India money market instruments / components /
constituents are following:
• Call Money Market
• Collateral Loan Market
• Acceptance Market
• Bill Market
Call Money Market
The market for extremely short period loans is referred to as the “ call money
market”. Bill brokers and dealers in stock exchange usually borrow money
at call loans from the commercial banks. These loans are given for a very
short duration, not exceeding 7 days. There are no collateral securities
demanded against these loans. The borrower has to repay the loan
immediately they are called for. As such, these loans are described as “ call
loans” or “ call money”. The call money market mainly serves the purpose
of ensuring the short term liquidity position of banks. Inter bank call
money is very common in India. Hence this market is also called as Inter
bank call money market. The funds are borrowed and lent in this market
at the call money rate which is determined by the market forces of
demand and supply of short term funds. The market experiences some
regular seasonal changes. It is normally tight during the busy season
(October – April). Call money market is very active in Mumbai, Kolkata and
Chennai. Of these, Mumbai call money market is the most important one.
MAJOR PARTICIPANTS
• The participants in the call money market include all
Scheduled Commercial Banks (Private Sector, Public
Sector and Cooperative banks), Financial Institutions
(Insurance Companies) and Mutual Funds. The
participants are classified into two categories:
1. Those who can both borrow and lend in this market
(only banks can do that)
2. Those who can lend but not borrow.
Recently, the RBI has permitted Non-Banking Financial
entities to lend in the call money market upto 85
percent of their average lending. Cosequently the
percentage share of lending of financial institutions
such as UTI,LIC and IDBI has come down.
WHY BANKS BORROW IN THE CALL MARKET
• The banks borrow from call market frequently for two reasons:
1. Banks may have surplus or shortage of funds while they close
their accounts on daily basis. In such case, the main function of
the market is to redistribute the pool of day – to – day’s surplus
funds of banks among other banks in temporary deficit of cash.
The banking business is such that the cash position of the banks
fluctuates from hour – to –hour and their closing cash position
at the end of the day may be different from their opening cash
position . Some banks may end up with surplus and some
others with deficit. Call money market provides an institutional
arrangement to channelise the surplus cash holding banks cash
towards those with shortage.
2. To meet the CRR
RBI AND CALL MONEY MARKET
• The RBI regulates the call money market and as a
regulatory, it intervenes in the market when call
money rates fluctuate violently. It intervenes
through two market intermediaries
1. The Securities Trading Corporation of India (STCI)
2. Discount and Finance House of India (DFHI).
It is to be clearly noted that the RBI can neither lend
nor borrow funds in the call money market. Its
role is confined to that of a regulator.
Collateral Loan Market
• When loans are offered against collateral
securities like stocks and bonds, they are
called “ Collateral Loans” and the market is
known as the “ Collateral Loan Market”.This
market is geographically most diversified.
Acceptance Market
• It refers to the market for banker’s acceptances involved
in trade transactions. A banker’s acceptance is a draft
drawn by an individual or firm upon a bank ordering it
to pay to the order of a designated party or to bearer a
certain sum of money at a particular future date and this
draft is accepted by the bank. Unlike cheques, banker’s
acceptance are used mainly in financing the movement
of goods in international trade. Banker’s acceptances
can be easily sold or discounted in the money market
called “ acceptance Market”.
Bill Market
It is a market in which short term papers or bills are bought or sold. The most important
types of short term papers are the commercial bills and the treasury bills.
• Commercial Bill: Commercial bill comprise bills of exchange and promisory [Link]
bill of exchange is a written unconditional order signed by the drawer/creditor requiring
the party to whom it is addressed the drawee/debtor to pay on demand or at a fixed or
determinable future time a definite sum of money to the order of a specified person
the payee or to the bearer. The period generally not exceeding three months or 90 days.
Such bills of exchange are discounted and rediscounted by commercial banks to lend
credit to the bill holder or to borrow from the central bank.
• Treasury bills are short term government security, usually of 91 days duration, sold by
the central bank on behalf of the government . A particular aspect of treasury bills is
that there is no prior rate of interest is fixed on them. The treasury offers these bills on
the basis of competitive bidding. Thus, one who bids the lowest interest will be alloted
the bills.
Discounting being the main process of exchange of credit in these segments of the money
market, they are also referred to as the “discount market”.
Bills of exchange are commercial papers ;on the other hand treasury bills are government
papers.