Introduction: The Banking System’s Daily Cash Flow
“Every day, banks face surpluses or shortages of cash. The call money market is where they balance these positions overnight, keeping the financial system humming.”
The call money market is where banks and financial institutions lend and borrow funds overnight. It’s the most liquid and most watched segment of the money market, directly reflecting banking system liquidity and RBI’s monetary policy impact.
What is Call Money?
Definition
Call money refers to overnight (one-day) borrowing and lending among banks and financial institutions, repayable on demand or “at call.”
Key Features
| Feature | Details |
|---|
| Tenor | Overnight (1 day) |
| Participants | Banks, primary dealers |
| Collateral | Unsecured |
| Minimum | No fixed minimum |
| Settlement | Same day |
| Rate | Market-determined |
Why “Call Money”?
The name comes from the fact that lent funds can be “called back” on demand—typically the next day.
Types of Inter-Bank Money
Call Money
| Aspect | Details |
|---|
| Maturity | Overnight |
| Repayment | Next working day |
| Use | Daily liquidity management |
Notice Money
| Aspect | Details |
|---|
| Maturity | 2-14 days |
| Notice | Typically 24 hours |
| Use | Short-term gaps |
Term Money
| Aspect | Details |
|---|
| Maturity | 15 days to 1 year |
| Terms | Pre-agreed |
| Use | Predictable needs |
Comparison
| Type | Tenor | Rate Level |
|---|
| Call | 1 day | Lowest |
| Notice | 2-14 days | Medium |
| Term | 15 days+ | Highest |
Call Money Market Participants
Who Can Participate
Borrowers and Lenders:
| Category | Role |
|---|
| Commercial banks | Both |
| Co-operative banks | Both |
| Primary dealers | Both |
| Development FIs | Lenders only |
Not Allowed
| Participant | Status |
|---|
| Corporates | Not permitted |
| Mutual funds | Not permitted (direct) |
| Insurance cos | Not permitted |
| NBFCs | Not permitted |
Typical Flow
| Scenario | From | To |
|---|
| Surplus bank | Lends | Deficit bank |
| Foreign bank excess | Lends | PSU bank shortfall |
| PD temporary | Borrows | Multiple banks |
Why Banks Use Call Money
Daily Cash Management
Cash Reserve Ratio (CRR):
- Banks must maintain 4.5% of deposits with RBI
- Daily average basis
- Shortfall on any day penalized
Daily Position:
| Event | Cash Position |
|---|
| Large withdrawals | Deficit |
| Large deposits | Surplus |
| Loan disbursements | Deficit |
| Loan repayments | Surplus |
Examples
Bank A - Deficit:
| Situation | Need |
|---|
| CRR shortfall | ₹500 crore |
| Large payment | ₹300 crore |
| Net need | ₹800 crore |
| Action | Borrow in call market |
Bank B - Surplus:
| Situation | Excess |
|---|
| Deposits received | ₹1,000 crore |
| Loans pending | ₹600 crore |
| Net excess | ₹400 crore |
| Action | Lend in call market |
Call Money Rate
What Determines Call Rate
| Factor | Impact |
|---|
| System liquidity | Surplus = lower rate |
| RBI policy | Repo rate is anchor |
| CRR maintenance | End of fortnight pressure |
| Government payments | Temporary surplus/deficit |
| Market sentiment | Risk perception |
Rate Behavior
Within LAF Corridor:
- Floor: SDF rate (6.25%)
- Ceiling: MSF rate (6.75%)
- Normal: Near repo (6.50%)
When Deviates:
| Rate Position | Indicates |
|---|
| Above repo | Tight liquidity |
| Near SDF | Excess liquidity |
| Near MSF | Severe shortage |
WACR (Weighted Average Call Rate)
RBI’s Target:
- Weighted average of all call trades
- Published daily by CCIL
- Key indicator for RBI operations
MIBOR
Mumbai Interbank Offer Rate
Definition: Benchmark rate for overnight inter-bank lending in India
Key Features
| Feature | Details |
|---|
| Calculated by | FBIL (Financial Benchmarks India) |
| Based on | Actual transactions |
| Published | Daily |
| Uses | Derivative pricing, loans |
MIBOR vs Call Rate
| Aspect | MIBOR | Call Rate |
|---|
| Calculation | Polled/transaction | Weighted average |
| Use | Benchmark | Actual market |
| Publisher | FBIL | CCIL |
Derivatives on MIBOR
OIS (Overnight Index Swap):
- Fixed vs floating (MIBOR)
- Used for rate hedging
- Large inter-bank market
Typical Daily Pattern
Morning Session
| Time | Activity |
|---|
| 9:00 AM | Market opens |
| 9:00-11:00 | Active trading |
| Banks assess | Daily cash position |
Afternoon Session
| Time | Activity |
|---|
| 2:00-3:00 | Intense activity |
| 3:00-5:00 | Final settlement |
| Banks complete | Position balancing |
End-of-Reporting Period
Fortnight End:
- CRR calculation period ends
- Higher urgency
- Rate may spike
Settlement
Process
| Step | Action |
|---|
| 1 | Banks negotiate rate, amount |
| 2 | Deal confirmed |
| 3 | Funds transferred via RTGS |
| 4 | Next day: reverse transfer |
Clearing Corporation
CCIL Role:
- Doesn’t clear call money
- But reports WACR
- Monitors market
Risk
| Risk Type | Nature |
|---|
| Credit | Counterparty default |
| Settlement | Payment failure |
| Rate | Rate moves against |
Relationship with RBI Policy
LAF as Anchor
| Market Rate | RBI Response |
|---|
| Call > MSF | No need (banks already at MSF) |
| Call at repo | Normal |
| Call < SDF | Absorb more via SDF |
Transmission Check
RBI Watches:
- Is WACR near repo?
- How quickly does it adjust?
- Any outliers or stress?
Example
| Event | Call Rate Reaction |
|---|
| RBI repo cut | Call falls within days |
| Liquidity injection | Call falls immediately |
| Large government spending | Call falls (surplus) |
| Tax payment dates | Call rises (outflow) |
Call Money and Banking Health
Indicator of Stress
| Signal | Implication |
|---|
| Rate spike | Some banks in trouble |
| Volume drop | Banks avoiding counterparty |
| Name-based lending | Specific bank avoided |
| RBI stepping in | Systemic concern |
Historical Episodes
| Event | Call Market Reaction |
|---|
| 2008 crisis | Rate spiked, RBI injected |
| IL&FS (2018) | Brief stress, NBFC concerns |
| Yes Bank (2020) | Specific counterparty concerns |
| COVID (2020) | Massive surplus, near-zero rates |
Modern Developments
TREPS (Tri-Party Repo)
Replaced CBLO:
| Feature | Details |
|---|
| Collateralized | G-secs backing |
| Broader participation | Including corporates, MFs |
| CCIL guaranteed | Lower counterparty risk |
| Dominant now | Larger than call money |
Call Money vs TREPS
| Aspect | Call Money | TREPS |
|---|
| Collateral | None | G-secs |
| Participants | Banks, PDs | Wider |
| Risk | Credit | Lower (collateral) |
| Rate | Higher | Lower |
Relevance for Investors
Indirect Impact
| Through | Effect |
|---|
| Liquid funds | TREPS returns |
| Debt funds | Rate environment |
| FD rates | Bank funding cost |
| Loan rates | Transmission |
What to Watch
| Indicator | Why |
|---|
| WACR trend | Liquidity direction |
| MIBOR | Benchmark for derivatives |
| RBI liquidity data | System health |
| Call rate spikes | Stress signals |
Key Takeaways
- Overnight lending – Banks balance daily cash needs
- Call rate key – Reflects system liquidity
- LAF corridor – Call rate stays within SDF-MSF
- WACR watched – RBI’s operational target
- MIBOR benchmark – Derivative pricing
- TREPS dominant – Collateralized gaining
- Stress indicator – Spikes signal trouble
Disclaimer
This article is for educational purposes only. Money markets are complex and primarily institutional. This is not investment advice.
Frequently Asked Questions
Q: Can I invest in call money?
A: Not directly—it’s an inter-bank market. But liquid funds invest in TREPS which is similar and safer (collateralized).
Q: Why does call rate sometimes exceed repo?
A: When liquidity is tight, banks compete for funds. If LAF repo is insufficient, rates rise toward MSF ceiling.
Q: What’s the connection between call rate and my loan rate?
A: Call rate → Bank’s funding cost → Passed to loan rates (with lag). Persistently high call rates may lead to loan rate hikes.
Q: How often is call rate published?
A: WACR is published daily by CCIL after market close. Real-time trading happens throughout the day.
Q: What’s the difference between call money and repo?
A: Call money is unsecured inter-bank lending. Repo uses government securities as collateral. RBI’s repo is with RBI; call is bank-to-bank.
The call money market is the heartbeat of banking liquidity—monitoring it reveals the daily pulse of the financial system and the effectiveness of monetary policy in real-time.
