CALL MONEY AND REPO MARKET

- Shashank Jogani

S.Y. BFM Roll No 28

INDEX
SR. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. TOPIC ACKNOWLEDGEMENT INTRODUCTION CALL MONEY MARKET OPERATIONS IN CALL MARKET INTEREST RATES IN CALL MARKET STEPS TAKEN BY RBI ADVANTAGES AND DISADVANTAGES IN CALL MARKET REPO MARKET - INTRODUCTION ADVANTAGES AND DISADVANTAGES OF REPO TYPES OF REPO REPO INTEREST RATES BIBLIOGRAPHY PAGE NO. 2 3 4 5 6 7 8 11 13 15 18 19

ACKNOWLEDGEMENT
I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and others. I would like to extend my sincere thanks to all of them. I am highly indebted to H.R College and the teaching faculty for their guidance and constant supervision as well as for providing necessary information regarding the project and also for their support in completing the project. I would like to express our gratitude towards my parents, fellow friends and the teacher for their kind co-operation and encouragement which helped me in completion of this project. My thanks and appreciations also goes to all those who have in some ways helped me in developing the project and people who have willingly helped me out with their abilities.

INTRODUCTION
The Indian money market is "a market for short-term funds with maturity ranging from overnight to one year and includes financial instruments that are deemed to be close substitutes of money. It is diversified and has evolved through many stages, from the conventional platform of treasury bills and call money to commercial paper, certificates of deposit, repos, FRAs and IRS more recently. The Indian money market consists of diverse sub-markets, each dealing in a particular type of short-term credit. The money market fulfils the borrowing and investment requirements of providers and users of short-term funds, and balances the demand for and supply of shortterm funds by providing an equilibrium mechanism. It also serves as a focal point for the Central Bank's intervention in the market. The Indian money market consists of the unorganised sector: moneylenders, indigenous bankers, chit funds; organised sector: Reserve Bank of India, private banks, public sector banks, development banks and other financial institutions such as Life Insurance Corporation of India (LIC), Unit Trust of India (UTI), the International Finance Corporation, IDBI, and the co-operative sector

CALL MONEY MARKET

The call money market deals in short term finance repayable on demand, with a maturity period varying from one day to 15 days. S.K. Muranjan commented that call loans in India are provided to the bill market, rendered between banks, and given for the purpose of dealing in the bullion market and stock exchanges.[2] Commercial banks, both Indian and foreign, cooperative banks, Discount and Finance House of India Ltd.(DFHI), Securities trading corporation of India (STCI) participate as both lenders and borrowers and Life Insurance Corporation of India (LIC), Unit Trust of India(UTI), National Bank for Agriculture and Rural Development (NABARD)can participate only as lenders. The interest rate paid on call money loans, known as the call rate, is highly volatile. It is the most sensitive section of the money market and the changes in the demand for and supply of call loans are promptly reflected in call rates. There are now two call rates in India: the Interbank call rate and the lending rate of DFHI. The ceilings on the call rate and inter-bank term money rate were dropped, with effect from May 1, 1989. The Indian call money market has been transformed into a pure inter-bank market during 200607. [3] The major call money markets are in Mumbai, Kolkata, Delhi, Chennai, Ah medabad. These loans are repayable on demand at the option of either the lender or the borrower. As stated earlier, these loans are given to brokers and dealers in stock exchange. Similarly, banks with surplus lend to other banks with deficit funds in the call money market. Thus, it provides an equilibrating mechanism for evening out short term surpluses and deficits. Moreover, commercial bank can quickly borrow from the call market to meet their statutory liquidity requirements. They can also maximize their profits easily by investing their surplus funds in the call market during the period when call rates are high and volatile.

OPERATIONS IN CALL MARKET

Borrowers and lenders in a call market contact each other over telephone. Hence, it is basically over-the-telephone market. After negotiations over the phone, the borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favour of the borrower. The borrower is turn issues call money borrowing receipt. When the loan is repaid with interest, the lender returns the lender the duly discharges receipt. Instead of negotiating the deal directly, it can be routed through the Discount and Finance House of India (DFHI), the borrowers and lenders inform the DFHI about their fund requirement and availability at a specified rate of interest. Once the deal is confirmed, the Deal settlement advice is lender and receives RBI cheque for the money borrowed. The reverse is taking place in the case of landings by the DFHI. The duly discharged call deposit receipt is surrendered at the time of settlement. Call loans can be renewed on the back of the deposit receipt by the borrower. Call loan market transitions and participants In India, call loans are given for the following purposes: 1. To commercial banks to meet large payments, large remittances to maintain liquidity with the RBI and so on. 2. To the stock brokers and speculators to deal in stock exchanges and bullion markets. 3. To the bill market for meeting matures bills. 4. To the Discount and Finance House of India and the Securities Trading Corporation of India to activate the call market. 5. To individuals of very high status for trade purposes to save interest on O.D or cash credit. The participants in this market can be classified into categories viz. 1. Those permitted to act as both lenders and borrowers of call loans. 2. Those permitted to act only as lenders in the market. The first category includes all commercial banks. Co-operative banks, DFHI and STCI. In the second category LIC, UTI, GIC, IDBI, NABARD, specified mutual funds etc., are included. They can only lend and they cannot borrow in the call market.

INTEREST RATES
The rate of interest on call funds is called money rate. Call money rates are characteristics in that they are found to be having seasonal and daily variations requiring intervention by RBI and other institutions. The concentration in the borrowing and lending side of the call markets impacts liquidity in the call markets. The presence or absence of important players is a significant influence on quantity as well as price. This leads to a lack of depth and high levels of volatility in call rates, when the participant structure on the lending or borrowing side alters. Short-term liquidity conditions impact the call rates the most. On the supply side the call rates are influenced by factors such as: deposit mobilization of banks, capital flows, and banks reserve requirements and on the demand side, call rates are influenced by tax outflows, government borrowing programme, seasonal fluctuations in credit off take. The external situation and the behaviour of exchange rates also have an influence on call rates as most players in this market run integrated treasuries that hold short term positions in both rupee and forex markets, deploying and borrowing funds through call markets. During normal times, call rates hover in a range between the repo rate and the reverse repo rate. The repo rate represents an avenue for parking short -term funds, and during periods of easy liquidity, call rates are only slightly above the repo rates. During periods of tight liquidity, call rates move towards the reverse repo rate. The behaviour of call rates has historically been influenced by liquidity conditions in the market. Call rates touched a peak of about 35% in May 1992, reflecting tight liquidity on account of high levels of statutory preemptions and withdrawal of all refinance facilities, barring export credit refinance. Call rates again came under pressure in November 1995 when the rates were 35% par.

STEPS TAKEN BY THE RBI

1. Both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. This will facilitate quick and timely debit and credit operations. 2. The call market enables the banks and institutions to even out their day to day deficits and surpluses of money. 3. Banks especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR). 4. The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis.

DEALING SESSIONS
Deals in the call money market can be done up to 5.00 pm on weekdays and 2.30pm on Saturdays or as specified by RBI from time to time.

ADVANTAGES OF CALL MONEY

In India, commercial banks play a dominant role in the call loan market. They used to borrow and lend among themselves and such loans are called inter-bank loans. They are very popular in India. So many advantages are available to commercial banks. They are as follows:

High Liquidity: Money lent in a call market can be called back at any time when needed. So, it is highly liquid. It enables commercial banks to meet large sudden payments and remittances by making a call on the market.

High Profitability: Banks can earn high profiles by lending their surplus funds to the call market when call rates are high volatile. It offers a profitable parking place for employing the surplus funds of banks temporarily.

Maintenance Of SLR: Call market enables commercial bank to minimum their statutory reserve requirements. Generally banks borrow on a large scale every reporting Friday to meet their SLR requirements. In absence of call market, banks have to maintain idle cash to meet5 their reserve requirements. It will tell upon their profitability.

Safe And Cheap: Though call loans are not secured, they are safe since the participants have a strong financial standing. It is cheap in the sense brokers have been prohibited form operating in the call market. Hence, banks need not pay brokers on call money transitions.

Assistance To Central Bank Operations: Call money market is the most sensitive part of any financial system. Changes in demand and supply of funds are quickly reflected in call money rates and give an indication to the central bank to adopt an appropriate monetary policy. Moreover, the existence of an efficient call market helps the central bank to carry out its open market operations effectively and successfully.

DRAWBACKS OF CALL MONEY

The call market in India suffers from the following drawbacks:

Uneven Development: The call market in India is confined to only big industrial and commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call markets are associated with stock exchanges. Hence the market is not evenly development.

Lack Of Integration: The call markets in different centers are not fully integrated. Besides, a large number of local call markets exist without an\y integration. Volatility In Call Money Rates: Another drawback is the volatile nature of the call money rates. Call rates very to greater extant indifferent centers indifferent seasons on different days within a fortnight. The rates very between 12% and 85%. One cannot believe 85% being charged on call loans.

 RESERVE BANK OF INDIA , , ..., -400001 : _______________________________________________________________________ www.rbi.org.in/hindi DEPARTMENT OF COMMUNICATION, Central Office, S.B.S.Marg, MumbaiWebsite : 400001 www.rbi.org.in /Phone: 91 22 2266 0502 /Fax: 91 22 2266 0358 - email: helpdoc@rbi.org.in

Money Market Operations as on June 28, 2012 (Amounts in ` crore, Rate in Per cent) MONEY MARKETS @ Volume (One Leg) A. Overnight Segment (I+II+III+IV) 101,663.76 I. Call Money III. Market Repo B. Term Segment IV. Market Repo 36.00 7.39 6.50 - 9.40 17,040.96 19,857.00 7.89 8.08 7.97 7.10 - 8.15 7.10 - 8.15 7.45 - 8.05 Weighted Average Rate Range

RBI OPERATIONS C. Liquidity Adjustment Facility (i) (ii) Repo Reverse Repo (1 day) (1 day)

Amount Outstanding

Current Rate

74,335.00 3,230.00

8.00 7.00

@ The information is based on provisional Reserve Bank of India (RBI) / Clearing Corporation of India Limited (CCIL) / Fixed Income Money Market and Derivatives Association of India (FIMMDA) Data. # The figure for the cash balances with RBI on Sunday is same as that of the previous day (Saturday). ^ Under Section 17(4-J) of the RBI Act 1934.

REPO MARKET

MEANING OF REPO
Repo means repurchase agreement. When RBI repurchases his issued govt. securities, it is called Repo transaction. With Repo transaction, RBI increases the liquidity in the market. Bank gets money for selling Govt. securities to RBI. This money can be used for loan issues to public. So, this way, liquidity will increase in the market. Always, Repo transaction is carried at repo rate which is changed by RBI from time to time. This repo rate is just like interest rate. Increase in repo rate, signals that deposit and advance rates of banks are likely to increase. Decrease in repo rate, indicates that deposit and advance rates of banks are likely to decline. The major function of the money market is to provide liquidity. To achieve this function and to even out liquidity changes, the Reserve Bank uses repos. Repo is a useful money market instrument enabling the smooth adjustment of short-term liquidity among varied market participants such as banks, financial institutions and so on. Repo is a money market instrument, which enables collateralized short term borrowing and lending through sale/purchase operations in debt instruments. Under a repo transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate. It is a temporary sale of debt involving full transfer of ownership of the securities, that is, the assignment of voting and financial rights. Repo is also referred to as a ready forward transaction as it is a means of funding by selling a security held on a spot basis and repurchasing the same on a forward basis. Though there is no restriction on the maximum period for which repos can be undertaken, generally, repos are done for a period not exceeding 14 days. Different instruments can be considered as collateral security for undertaking the ready forward deals and they include Government dated securities, treasury bills. In a typical repo transaction, the counter-parties agree to exchange securities and cash,

with a simultaneous agreement to reverse the transactions after a given period. To the lender of cash, the securities lent by the borrower serves as the collateral; to the lender of securities, the cash borrowed by the lender serves as the collateral. Repo thus represents collateralized short term lending. The lender of securities (who is also the borrower of cash) is said to be doing the repo; the same transaction is a reverse repo in the books of lender of cash (who is also the borrower of securities).

MEANING OF REVERSE REPO

Reverse Repo means reverse repurchase agreement. Actually, central bank RBI has power to issue the Govt. securities. But these securities are exchanged between bank and RBI from time to time. When RBI sells govt. securities to banks, it is called a reverse repo transaction. RBI will take decision to sell Govt. securities when RBI wants to absorb or decrease the liquidity in the market. As per Wikipedia "A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints." A reverse repo is the mirror image of a repo. For, in a reverse repo, securities are acquired with a simultaneous commitment to resell. Hence whether a transaction is a repo or a reverse repo is determined only in terms of who initiated the first leg of the transaction. When the reverse repurchase transaction matures, the counter- party returns the security tithe entity concerned and receives its cash along with a profit spread. One factor which encourages an organization to enter into reverse repo is that it earns some extra income omits otherwise idle cash. The difference between the price at which the securities are bought and sold is the lenders profit or interest earned for lending the money. The transaction combines elements of both a securities purchased/sale operation and also a money market borrowing/lending operation.

IMPORTANCE OF REPOS:
Interest Rate: Being collateralized loans, repos help reduce counter-party risk and therefore, fetch a low interest rate especially in a volatile market. Safety: Repo is an almost risk-free instrument used to even-out liquidity changes in the system. Repos offer safe short-term outlet for temporary excess cash at close to market interest rates. Uses: As low-risk and flexible short-term instruments, repos are used to finance securities held in trading and investment account of security dealers, to establish short positions, to implement arbitrage activities besides meeting specific customer needs. They offer low-cost investment opportunities with combination of yield and liquidity. In India, repo transactions are basically fund management/statutory liquidity reserve (SLR) management devices used by banks. Cash Management Tool: The repo arrangement essentially serves as a short-term cash management tool as the bank receives cash from the buyer in return for the securities. This helps the banks to meet temporary cash requirements. This also makes the repos a pure money lending operation. On maturity of repos, the security is purchased back by the seller of the securities. Liquidity Control: The RBI uses repos as a tool of liquidity control for absorbing surplus liquidity from the banking system in a flexible way and there preventing interest rate arbitraging. All repo transactions are to be affected at Mumbai only and the deals are to be necessarily put through the subsidiary general ledger (SGL) account with the Reserve Bank of India.

RISKS OF REPO
While classic repos are generally credit-risk mitigated instruments, there are residual credit risks. Though it is essentially a collateralized transaction, the seller may fail to repurchase the securities sold, at the maturity date. In other words, the repo seller defaults on his obligation. Consequently, the buyer may keep the security, and liquidate the security to recover the cash lent. The security, however, may have lost value since the outset of the transaction as the security is subject to market movements. To mitigate this risk, repos often are overcollateralized as well as being subject to daily mark-to-market margining (i.e., if the collateral falls in value, a margin call can be triggered asking the borrower to post extra securities). Conversely, if the value of the security rises there is a credit risk for the borrower in that the creditor may not sell them back. If this is considered to be a risk, then the borrower may negotiate a repo which is under-collateralized.[6] Credit risk associated with repo is subject to many factors: term of repo, liquidity of security, the strength of the counterparties involved, etc. Certain forms of repo transactions came into focus within the financial press due to the technicalities of settlements following the collapse of Refco in 2005. Occasionally, a party involved in a repo transaction may not have a specific bond at the end of the repo contract. This may cause a string of failures from one party to the next, for as long as different parties

have transacted for the same underlying instrument. The focus of the media attention centers on attempts to mitigate these failures.

TYPES OF REPO
There are three types of repo maturities: overnight, term, and open repo. Overnight refers to a one-day maturity transaction. Term refers to a repo with a specified end date. Open simply has no end date. Although repos are typically short-term, it is not unusual to see repos with a maturity as long as two years. Repo transactions occur in three forms: specified delivery, tri-party, and held in custody (wherein the "selling" party holds the security during the term of the repo). The third form (hold-in-custody) is quite rare, particularly in developing markets, primarily due to the risk that the seller will become insolvent prior to maturation of the repo and the buyer will be unable to recover the securities that were posted as collateral to secure the transaction. The first formspecified deliveryrequires the delivery of a prespecified bond at the onset, and at maturity of the contractual period. Tri-party essentially is a basket form of transaction, and allows for a wider range of instruments in the basket or pool. In a tri-party repo transaction a third party clearing agent or bank is interposed between the "seller" and the "buyer" The third party maintains control of the securities that are the subject of the agreement and processes the payments from the "seller" to the "buyer." 1. Due bill/hold in-custody repo In a due bill repo, the collateral pledged by the (cash) borrower is not actually delivered to the cash lender. Rather, it is placed in an internal account ("held in custody") by the borrower, for the lender, throughout the duration of the trade. This has become less common as the repo market has grown, particularly owing to the creation of centralized counterparties. Due to the high risk to the cash lender, these are generally only transacted with large, financially stable institutions. 2. Tri-party repo The distinguishing feature of a tri-party repo is that a custodian bank or international clearing organization, the tri-party agent, acts as an intermediary between the two parties to the repo. The tri-party agent is responsible for the administration of the transaction including collateral allocation, marking to market, and substitution of collateral. In the US, the two principal tri-party agents are The Bank of New York Mellon and JP Morgan Chase. The size of the US tri-party repo market peaked in 2008 before the worst effects of the crisis at approximately $2.8 trillion and by mid-2010 was about $1.6 trillion.[1] As tri-party agents administer hundreds of billions of US$ of collateral, they have the scale to subscribe to multiple data feeds to maximise the universe of coverage. As part of a tri-party agreement the three parties to the agreement, the tri-party agent, the repo buyer and the repo seller agree to a collateral management service agreement which includes an "eligible collateral profile". It is this "eligible collateral profile" that enables the repo buyer to define their risk appetite in respect of the collateral that they are prepared to hold against their cash. For example a more risk averse repo buyer may wish to only hold "on-the-run" government bonds as collateral. In the event of a liquidation event of the repo seller the collateral is highly liquid thus enabling the repo buyer to sell the collateral quickly. A less risk-averse repo buyer may be prepared to

take non-investment grade bonds or equities as collateral, which may be less liquid and may suffer higher price volatility in the event of a repo seller default, making it more difficult for the repo buyer to sell the collateral and recover their cash. The tri-party agents are able to offer sophisticated collateral eligibility filters which allow the repo buyer to create these "eligible collateral profiles" which can systemically generate collateral pools which reflect the buyer's risk appetite. Collateral eligibility criteria could include asset type, issuer, currency, domicile, credit rating, maturity, index, issue size, average daily traded volume, etc. Both the lender (repo buyer) and borrower (repo seller) of cash enter into these transactions to avoid the administrative burden of bi-lateral repos. In addition, because the collateral is being held by an agent, counterparty risk is reduced. A tri-party repo may be seen as the outgrowth of the due bill repo, in which the collateral is held by a neutral third party. 3. Whole loan repo A whole loan repo is a form of repo where the transaction is collateralized by a loan or other form of obligation (e.g. mortgage receivables) rather than a security. 4. Equity repo The underlying security for many repo transactions is in the form of government or corporate bonds. Equity repos are simply repos on equity securities such as common (or ordinary) shares. Some complications can arise because of greater complexity in the tax rules for dividends as opposed to coupons. 5. Sell/buy backs and buy/sell backs A sell/buy back is the spot sale and a forward repurchase of a security. It is two distinct outright cash market trades, one for forward settlement. The forward price is set relative to the spot price to yield a market rate of return. The basic motivation of sell/buy backs is generally the same as for a classic repo, i.e. attempting to benefit from the lower financing rates generally available for collateralized as opposed to non-secured borrowing. The economics of the transaction are also similar with the interest on the cash borrowed through the sell/buy back being implicit in the difference between the sale price and the purchase price. There are a number of differences between the two structures. A repo is technically a single transaction whereas a sell/buy back is a pair of transactions (a sell and a buy). A sell/buy back does not require any special legal documentation while a repo generally requires a master agreement to be in place between the buyer and seller (typically the SIFMA/ICMA commissioned Global Master Repo Agreement (GMRA)). For this reason there is an associated increase in risk compared to repo. Should the counterparty default, the lack of agreement may lessen legal standing in retrieving collateral. Any coupon payment on the underlying security during the life of the sell/buy back will generally be passed back to the buyer of the security by adjusting the cash paid at the termination of the sell/buy back. In a repo, the coupon will be passed on immediately to the seller of the security. A buy/sell back is the equivalent of a "reverse repo".

6. Securities lending In securities lending, the purpose is to temporarily obtain the security for other purposes, such as covering short positions or for use in complex financial structures. Securities are generally lent out for a fee and securities lending trades are governed by different types of legal agreements than repos. Repos have traditionally been used as a form of collateralized loan and have been treated as such for tax purposes. Modern Repo agreements, however, often allow the cash lender to sell the security provided as collateral and substitute an equivalent security at repurchase. In this way the cash lender acts as a security borrower and the Repo agreement can be used to take a short position in the security very much like a security loan might be used.

REPO RATE:
Repo rate is nothing but the annualised interest rate for the funds transferred by the lender to the borrower. Generally, the rate at which it is possible to borrow through a repo is lower than the same offered on unsecured (or clean) inter-bank loan for the reason that it is collateralized transaction and the credit worthiness of the issuer of the security is often higher than the seller. Other factors affecting the repo rate include the credit worthiness of the borrower, liquidity of the collateral and comparable rates of other money marketinstru ments. In a repo transaction, there are two legs of transactions viz. selling of the security and repurchasing of the same. In the first leg of the transaction which is for a nearer date, sale price is usually based on the prevailing market price for outright deals. In the second leg, which is for a future date, the price is structured based on the funds flow of interest and tax elements of funds exchanged. This is on account of two factors. First, as the ownership of securities passes on from seller to buyer for the repo period, legally the coupon interest accrued for the period has to be passed on to the buyer. Thus, at the sale leg, while the buyer of security is required to pay the accrued coupon interest for the broken period, at the repurchase leg, the initial seller is required to pay the accrued interest for the broken period to the initial buyer. Generally, norms are laid down for accounting of repos and valuation of collateral are concerned. While there are standard accounting norms, generally the securities used as collateral in repo transactions are valued at current market price plus accrued interest (on coupon bearing securities) calculated to the maturity date of the agreement less "margin" or "haircut". The haircut is to take care of market risk and it 1. RBI INTEREST RATES LAST YEAR protects either the borrower or lender depending upon how the transaction is priced. The size of the haircut will depend on the repo period, risky ness of the securities involved and the coupon rate of the underlying securities. Since fluctuations in market prices of securities would be a concern for both the lender as well as the borrower it is a common practice to reflect the changes in market price by resorting to marking to market. Thus, if the market value of the repo securities decline beyond a point the borrower may be asked to provide additional collateral to cover the loan. On the other hand, if the market value of collateral rises substantially, the lender may be required to return the excess collateral to the borrower.

2. LONG TERM GRAPH OF RBI INTEREST RATES

BIBLIOGRAPHY
http://www.managementparadise.com/forums/financial-markets/15776-call-moneymarkets.html http://www.investopedia.com/terms/i/interbank_call_money_market.asp#ixzz1z9gPg Wm4 http://www.scribd.com/doc/17856735/Indian-Money-Market http://www.mbaknol.com/investment-management/the-call-money-market/ http://bankingindiaupdate.com/moneymarket.htm cisce.timesofindia.com http://www.scribd.com/doc/44207511/Introduction-to-Repo-Market http://www.scribd.com/doc/25135819/Call-Money-Market-in-india