Every commercial bank in India borrow funds from other banks to cover a sudden shortfall in cash on a particular day in the following circumstances.
- to tide down the temporary requirements of funds due to liquid asset-liability mismatch
- to meet the mandatory requirement of CRR&SLR or
- to meet the demand for funds arising out of unexpected outflow of large volume of funds.
The call money market is open only for scheduled commercial banks and the primary dealers. In this market overnight (one day) loans can be availed by banks to meet their short term liquidity requirements. Concurrently, Call Money Market also provides opportunities to the banks that have day to day surplus money to lend and earn profit out of it. Thus, the banks who seeks to avail liquidity approach the call market as borrowers and the ones who have excess liquidity participate there as lenders.
The call money market is open only for scheduled commercial banks and the primary dealers. The dealing in call money is done through the electronic trading platform of NDS. The market functions from Monday to Friday. The banks which need funds may borrow money by participating in auction or negotiation in the CMM. The auction is only for interest rate that means whoever is ready to give higher rate of interest will get the loan. The participants are also free to decide on interest rates on negotiation by the counterparties. The average interest on the overnight funds at annualized rate in the call money market on a particular day is known as call rate. The money so borrowed which is returned with the interest at the start of business the next day is known as ‘call money’.
The repo rate of RBI normally act as floor rate for call money, as normally banks first approach RBI for funds requirements before entering the call money market when call rate are higher than fixed repo rate. Similarly, when call money rate is lower than reverse repo rate, banks will first rush to RBI to park their excess funds at the fixed reverse repo rate.