Call money

The money market is where instruments maturing in under one year are lent and borrowed. Call money is its shortest rung: money lent today and returned tomorrow.

Two features define it. It is unsecured — no collateral changes hands, the lender relies on the borrower's credit standing. And it is purely interbank: in India the call money market is restricted to Scheduled Commercial Banks (SCBs) and Primary Dealers (PDs). No mutual fund, no corporate, and certainly no individual lends call money.

Transactions are dealt and reported on the Reserve Bank of India's NDS-CALL platform, which is managed by CCIL, and are predominantly overnight — the tenor may be extended to account for weekends and holidays. Settlement is by RBI.

Call money sits at the head of a short ladder of uncollateralised interbank money, and the exam tests the rungs against each other:

Alongside them sit the collateralised instruments — market repo in G-Secs (overnight to 1 year, CROMS platform, settled by CCIL, minimum market order Rs 1 crore), TREPS (Rs 5 lakh and multiples, settled by CCIL) and corporate bond repo — plus the discounted instruments, T-bills, CMBs, commercial paper and certificates of deposit.

Why the overnight rate is watched so closely: the money market is the primary transmission channel of the central bank's monetary policy, and a liquid money market is critical to financial stability. The workbook makes the point with a single example — a trigger of the Global Financial Crisis of 2008 was the seizing up of lending in the international overnight money markets.

A scheduled commercial bank closes the day Rs 250 crore short of its reserve requirement, and borrows that amount overnight in the call money market at 6.45%.

Interest for one night = 250,00,00,000 × 6.45% × (1 ÷ 365)
                       = Rs 4,41,780

Rs 4.42 lakh to be Rs 250 crore short for one night. Now let the overnight rate spike 100 basis points, to 7.45% — which is exactly what a liquidity squeeze looks like from the inside:

Interest for one night = 250,00,00,000 × 7.45% × (1 ÷ 365)
                       = Rs 5,10,274

The difference is Rs 68,494 for one night. Trivial in isolation. But a bank funding a Rs 250 crore gap every night for a quarter pays roughly Rs 61.6 lakh more over ninety days, which is why the call rate moves bank behaviour long before it reaches a newspaper.

For an adviser the examinable point is the one the arithmetic hides: the client cannot be in this market at all. Even the minimum market order is Rs 1 lakh, and eligibility is limited to SCBs and primary dealers. A retail investor reaches overnight money only indirectly, through a liquid scheme holding TREPS, T-bills, commercial paper and certificates of deposit — which is also why such a scheme's yield tracks the overnight rate rather than a deposit rate.

Chapter 9 (Investing in Fixed Income Securities), section 9.8 — Introduction to Money Market — and Chapter 5, which names call and short-notice money and Treasury Bills as the most significant segments of the Indian money market. The instrument table in 9.8.2 is mined hard: tenor, trading platform, settlement agency and minimum lot for each instrument. Typical questions: "which instrument has a tenor of 2 to 14 days" (notice money), and "who may participate in the call money market" (scheduled commercial banks and primary dealers only).

• Call is overnight, notice is 2–14 days, term is 15 days to one year. Three names, three tenors, and the paper swaps them freely.
• Call money is uncollateralised. Repo, triparty repo and corporate bond repo are collateralised — that distinction is the spine of the money market table.
• It is interbank only. Mutual funds, NBFCs, corporates, insurers and pension funds are all listed as money market participants, and none of them may lend or borrow call money.
• NDS-CALL is RBI's platform but is managed by CCIL, and call money settles at RBI — while market repo and TREPS settle at CCIL. Naming the wrong settlement agency loses a whole mark.
• Minimum market orders differ by instrument: Rs 1 lakh for call, notice and term money; Rs 5 lakh and multiples for TREPS; Rs 1 crore for market repo in G-Secs; Rs 10,000 and multiples for T-bills and CMBs.
• Not every money market instrument matures within a year. Banks issue certificates of deposit for 7 days to one year, but financial institutions issue them for one to three years.