Call money market is a market for very

short term funds repayable on demand

with maturity period varying between one
day to a fortnight.
Until march 1978,transaction in the call
money market were usually effected
through brokers.
RBI has prohibited banks paying brokerage
on operations in the call money market.

The seasonal nature of the call money

market would be reflected in two indicators:
1. A decline in money at call and short
notice should be greater in the slack
season than in the busy season of the
given year.
2. An increase in money at call and short
notice should be greater in busy season
than the slack season.

The need for call money borrowings is the

highest around march every year1.withdrawals of deposits in march to
meet year end tax payments.
2.withdrwal of funds by financial
institutions to meet their statutory
obligations.
Call money borrowings tend to increase
when there is an increase in CRR.

Call Money" means deals in overnight funds

"Notice Money" means deals in funds for 2 - 14
days
"Fortnight" shall be on a reporting Friday basis
and
mean the period from Saturday to the second
following Friday, both days inclusive
"Bank or banking company" means a banking
company or a "corresponding new bank",
"State Bank of India" or "subsidiary bank and
includes a "co-operative bank"

Scheduled bank means a bank included in the

Second Schedule of the Reserve Bank of India
Act, 1934
"Primary Dealer" means a financial institution
which holds a valid letter of authorization as a
Primary Dealer issued by the Reserve Bank, in
terms of the "Guidelines for Primary Dealers in
Government Securities Market
"Capital Funds" means the sum of the Tier I and
Tier II capital as disclosed in the latest audited
balance sheet of the entity

As per RBI definitions A market for short

terms financial assets that are close
substitute for money, facilitates the
exchange of money in primary and
secondary market.
The money market is a mechanism that
deals with the lending and borrowing of
short term funds (less than one year).
A segment of the financial market in which
financial instruments with high liquidity and
very short maturities are traded.

Commercial banks and co operative

banks are the participants
LIC, GIC, UTI direct participants.
Indirect participants -IDBI,IFC,ICICI.
Located in big industrial and commercial
centers like Mumbai, Chennai, Calcutta,
Delhi etc
Market has expanded small banks and
nonscheduled banks also participate in
this market.

Participation of foreign banks as borrower

has increased to meet CRR requirements.
After 1970 SBI has been regularly
participating in this market, a major
lender but a small borrower.
As per latest RBI policy LIC,UTI,GIC,IDBI,
and NABARAD are allowed to participate
as lenders and not as borrowers.

In APRIL 1991 RBI announced that

lenders should provide evidence to RBI
about-bulk lend able resources and no
outstanding borrowings from banks.
They will be required to observe a
minimum size of operations of Rs 20 Cr
per transactions.
Participate with prior permission of RBI
and only through DFHI.

RBI has permitted four primary dealers to

participate as both lenders and
borrowers.
Mutual funds as lenders.

Located in big industrial and commercial

centers like Mumbai, Chennai, Calcutta,
Delhi etc
There are large number of local call
markets developed and operated by
indigenous local bankers.

Market for very short term funds, known as

money on call
The rate at which funds are borrowed in
this market is called `Call Money rate'
The size of the market for these funds in
India is between Rs 60,000 million to Rs
70,000 million
Of which public sector banks account for
80% of borrowings
Foreign banks/private sector banks
account for the balance 20%

Total call loans in India increased from Rs 9.3 Cr

in 1955-56 to Rs 7,147 Cr in 1995-96 and to Rs
36093 Cr in 2003.
Total turnover (borrowings) in the following
years: years
Rs. (in Billion)
1991-92

16,450

1993-94

22,510

1994-95

17,030

1995-96

20,980

1996-97

15,450

The daily average borrowings by all banks

and PDs were Rs 9,465 Cr in 1996 and Rs
10,203 Cr in 1997.
Foreign banks daily average Borrowings
were Rs 2,531 Cr in 1996 and Rs 3,807 in
1997.
The cumulative turnover (borrowings and
landings) was Rs 1,499 billion in 1995-96
and Rs 2,743 billion in 1996-97

Large borrowings by banks to meet CRR

requirements.
Credit operations of certain banks tend to
be much higher than their resources.
Occasional factors in the market.
Withdrawal of funds by corporate for
business needs and payment of advance
tax.
Liquidity crisis and illiquidity of money.

In US there are two markets which can be

said to form the call money markets:
Federal funds market: Transactions between
banks involving borrowing or lending of
banks deposits at federal reserve banks for
one day at a specified rate of interest.
Call money market proper: The call loans
represent short term loans by banks to
security brokers and dealers for the purpose
of financing their customers to purchase
common stock.

In UK the call money market consist of

three parts:
Clearing banks loans to discount houses
Inter bank loans
Mobilization of surplus money by discount
houses among themselves before they
approach the bank of England for financial
accommodation.
(Existence of an intermediary in the form of
discount houses in between Bank of
England and commercial banks is a
peculiar feature of British money market)

The size of call market in India has been

much smaller than that of the US and UK
because of some factors:
- The bill market in India is
underdeveloped.
- Unlike in the UK, discounting facilities
available to banks in India.
- Loans to security lenders can not be large.
- Indian commercial banks hold fairly large
cash reserves.

Borrowers and lenders contact each other over

telephone.
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 in turn issues call money
borrowing receipt.
When the loan is repaid with interest, the lender
returns the duly discharged receipt

The deal can be directly negotiated by routing it 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

exchanged.

In case the DFHI borrows, it issues a call deposit receipt to

the lender and receives RBI cheque for the money borrowed.
The reverse takes place in the case of lendings by the DFHI.
The duly discharged call deposit receipt is surrendered at
the time of settlement.
Call loans can be renewed upto a maximum period of 14
days only and such renewals are recorded on the back of the
deposit receipt by the borrower

Treasury Bills are money market instruments

to finance the short term requirements of the
Government of India.
These are discounted securities and thus are
issued at a discount to face value.
The return to the investor is the difference
between the maturity value and issue price.

Types of Treasury bills based on the maturity

period and utility of the issuance like, ad-hoc
Treasury bills, 3 months, 12months Treasury
bills etc. In India, at present, the Treasury
Bills are the 91-days 182 days and 364-days
Treasury bills.

T-bills are sold through an auction process

announced by the RBI at a discount to its face
value. RBI issues a calendar of T-bill auctions
It also announces the exact dates of auction,
the amount to be auctioned and payment
dates. T-bills are available for a minimum
amount of Rs. 25,000 and in multiples of Rs.
25,000.
Banks and PDs are major bidders in the T-bill
market.
Both discriminatory and uniform price auction
methods are used in issuance of T-bills.

Currently, the auctions of all T-bills are

multiple/discriminatory price auctions, where the successful
bidders have to pay the prices they have actually bid for.
Non-competitive bids, where bidders need not quote the
rate of yield at which they desire to buy these T-bills, are
also allowed from provident funds and other investors.
RBI allots bids to the non-competitive bidders at the
weighted average yield arrived at on the basis of the yields
quoted by accepted competitive bids at the auction.
Allocations to non-competitive bidders are outside the
amount notified for sale. Noncompetitive bidders therefore
do not face any uncertainty in purchasing the desired
amount of T-bills from the auctions.

No tax deducted at source

Zero default risk being sovereign paper
Highly liquid money market instrument
Better returns especially in the short term
Transparency
Simplified settlement
High degree of tradability and active secondary
market facilitates meeting unplanned fund
requirements.

Market related yields

Ideal matching for funds management
particularly for short term tenors of less than
15 days.
Transparency in operations as the
transactions would be put through Reserve
Bank of Indias SGL (subsidiary general
ledger) or Clients Gilt account only
Two way quotes offered by primary dealers
for purchase and sale of treasury bills.
Certainty in terms of availability, entry & exit

The auction of treasury bills is done only at Reserve Bank

of India, Mumbai.
Bids are to be submitted on NDS (Negotiable Dealing
System) by 2:30 PM on Wednesday. If Wednesday
happens to be a holiday then bids are to submitted on
Tuesday.
Bids are submitted in terms of price per Rs 100. For
example, a bid for 91-day Treasury bill auction could be
for Rs 97.50.
Auction committee of Reserve Bank of India decides the
cut-off price and results are announced on the same day.
Bids above the cut-off price receive full allotment; bids
at cut-off price may receive full or partial allotment and
bids below the cut-off price are rejected.

Multiple Price Based or French Auction

Uniform Price Based or Dutch auction

Scheduled banks,
Financial Institutions,
Primary dealers,
Mutual funds,
Insurance companies and
Corporate treasuries

T-bills are issued at a discount and are

redeemed at par. The implicit yield in the Tbill is the rate at which the issue price
(which is the cut-off price in the auction)
has to be compounded, for the number of
days to maturity, to equal the maturity
value.
Yield, given price, is computed using the
formula:
= ((100-Price)*365)/ (Price * No of days to
maturity)

Similarly, price can be computed, given

yield, using the formula:
= 100/(1+(yield% * (No of days to
maturity/365))

A treasury bill maturing on 28-Jun2002 is trading in the market on 3Jul-2001 at a price of Rs. 92.8918.
What is the discount rate inherent
in this price?

2. What is the price at which a

treasury bill maturing on 23rd
March 2002 would be valued on July
13, 2001 at a yield of 6.8204%?