Call money market

Indian Economy glossary

Also called: Call money, Notice money, Term money · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

The call money market is the market where banks lend to and borrow from each other for short periods without any security (unsecured). By loan length (tenor), it has three parts: call money is overnight (1 day), notice money is 2–14 days, and term money is 15 days to 1 year.

It matters because it is where banks fix their cash shortages and surpluses every day. The call rate (the interest rate in this market) is the quickest signal of whether the banking system has too little or too much cash. It is also the first place where a change in the RBI's policy rate starts to work.

Explanation

How it works

  • Money market is the market for borrowing and lending for up to one year. The call money market is its uncollateralised part.

  • Uncollateralised means the borrower pledges no security. The lender trusts only the borrower's creditworthiness (its ability to repay).

  • Each day, some banks end up with spare cash. Others fall short, for example to meet reserve rules or big customer withdrawals.

  • A bank with a surplus lends it in the call market.
  • A bank with a shortage borrows it there.

  • The loan is repaid with interest when the tenor ends.

  • Three segments by tenor:

Segment Tenor
Call money Overnight (1 day)
Notice money 2–14 days
Term money 15 days to 1 year

Who may take part

  • Only banks and primary dealers (PDs) are allowed.

  • Primary dealers are RBI-authorised firms that buy government securities at auctions and then sell them on to other investors.

  • Companies, mutual funds and individuals are kept out. They use the repo markets instead, where the lender holds securities as safety.

What makes the call rate rise or fall

  • Too little cash in the banking system
  • Many banks want to borrow.
  • They compete for funds by offering higher rates.

  • → The call rate rises.

  • Too much cash in the system

  • Many banks want to lend and few want to borrow.

  • → The call rate falls.

  • RBI policy moves

  • When the RBI changes the repo rate (the rate at which the RBI lends to banks for a short time), overnight rates, including the call rate, move with it.

  • Risk premium: call loans are unsecured, so the lender takes more risk than in a repo. That is why the call rate is usually a little above the repo and TREPS rates.

Worked example (illustrative)

  • Bank A has ₹100 crore spare today. Bank B is short. Bank A lends to Bank B overnight in the call market at 6% a year, with no collateral.
  • Interest = 100 × 0.06 × 1/365 ≈ ₹0.0164 crore, or about ₹1.64 lakh.
  • Tomorrow Bank B repays about ₹100.0164 crore.
  • If Bank B fails to pay, Bank A has no securities to sell. In a repo, Bank A would hold G-secs (government securities) that it could sell.

In India

  • Regulator: the RBI decides who may take part, which is only banks and PDs.
  • Operating target: the RBI's operating target for monetary policy is the WACR (weighted average call rate), the average overnight call rate weighted by the size of each deal. It is the rate the RBI tries to keep close to its policy repo rate.
  • Benchmark: FBIL (Financial Benchmarks India Ltd) publishes the FBIL-Overnight MIBOR (Mumbai Interbank Offered Rate), India's benchmark for overnight interbank lending.
  • It was launched on 22 July 2015 and is built from actual traded rates. It replaced the FIMMDA-NSE MIBID/MIBOR, which was based on rates banks reported in a poll [1].

  • The change followed the Committee on Financial Benchmarks and worries about benchmark manipulation [1].

  • Shift from unsecured to secured borrowing:

  • TREPS (Tri-party Repo Dealing and Settlement) replaced CBLO in November 2018. CCIL (Clearing Corporation of India Ltd) manages the collateral and guarantees settlement.

  • Mutual funds and other non-banks cannot enter the call market, so they lend in TREPS. TREPS is now the largest money-market segment, bigger than the call market.

  • Move to a secured benchmark: on 6 December 2024, the RBI announced a new Secured Overnight Rupee Rate (SORR), to be built from basket repo and TREPS deals and implemented by FBIL [2]. It follows the Committee on the MIBOR Benchmark, chaired by R. Subramanian [2].

Don't confuse with

  • Repo / TREPS: these are secured, because the borrower hands over securities. Call money is unsecured. So the usual order is repo/TREPS rate ≤ call rate.
  • Treasury bills (T-bills): these are short-term debt of the Government of India (91, 182 and 364 days), sold at a discount. Call money is a bank-to-bank loan, not a security that can be traded.
  • Capital market: it deals in shares and bonds lasting more than one year. The call market, like the rest of the money market, lasts up to one year.
  • Commercial Paper (CP): CP is also unsecured, but it is issued by companies, NBFCs and other firms. Only banks and PDs can borrow in the call market.

Prelims Hooks

  • Tenors: call money = overnight (1 day); notice money = 2–14 days; term money = 15 days to 1 year.
  • Only banks and primary dealers may take part. Mutual funds, companies and individuals are excluded. Trap: a question may list mutual funds as call-market participants. They are not.
  • The call market is unsecured (uncollateralised). The repo market is collateralised.
  • FBIL-Overnight MIBOR (22 July 2015) is based on traded rates. It replaced the polled FIMMDA-NSE MIBID/MIBOR [1].
  • TREPS replaced CBLO in November 2018, with CCIL as the tri-party agent. TREPS, not the call market, is now the largest money-market segment.
  • SORR, based on basket repo and TREPS and implemented by FBIL, was announced by the RBI on 6 December 2024 [2]. It is a secured rate, unlike the unsecured MIBOR.

Mains Points

  • Monetary transmission starts here (GS-III):
  • RBI changes the repo rate → overnight call and TREPS rates move → CP, CD and T-bill yields follow → bank loan and deposit rates change.

  • A deep, liquid call market helps RBI policy reach the economy faster. This supports inflation targeting.

  • Shift from unsecured to secured markets:

  • Money has moved from call loans to TREPS and repo, where CCIL clears and guarantees trades. This lowers counterparty risk (the risk that the other side fails to pay).

  • The trade-off: more money-market cash now depends on CCIL, which becomes a single point whose failure would hit the whole system (systemic concentration).

  • Benchmark integrity:

  • The LIBOR rigging scandal showed the danger of rates that banks simply report. LIBOR was phased out by June 2023.
  • India's path runs from polled MIBOR, to traded FBIL-MIBOR (2015) [1], to the secured SORR (2024 decision) [2]. Each step makes loan and derivative prices more trustworthy.
  • The cost: existing contracts must be moved to the new rate, and SORR needs a deep repo market behind it.

Related concepts

Read more

Sources

  1. 1RBI Press Release: FBIL Overnight MIBOR benchmark (July 2015)rbi.org.in · tier 1
  2. 2RBI Press Release: Secured Overnight Rupee Rate (SORR) / Committee on MIBOR Benchmark (6 December 2024)rbi.org.in · tier 1