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.
The call money market is open only for scheduled commercial banks and primary dealers. In this market, overnight (one-day) loans can be availed by banks to meet their short-term liquidity requirements. Concurrently, the 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 seek 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 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 that need funds may borrow money by participating in an auction or negotiation in the CMM. The auction is only for interest rate which means whoever is ready to give a 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 an annualized rate in the call money market on a particular day is known as the call rate. The money so borrowed which is returned with interest at the start of business the next day is known as ‘call money’.
The repo rate of RBI normally acts as the floor rate for call money, as normally banks first approach RBI for funds requirements before entering the call money market when call rates are higher than the fixed repo rate. Similarly, when the call money rate is lower than the reverse repo rate, banks will first rush to RBI to park their excess funds at the fixed reverse repo rate.
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