Call Money Rate
- Banks have to maintain a minimum level of cash to meet the daily transaction level and also maintain the Cash Reserve Ratio i.e. the minimum cash balance that has to be maintained by banks. It is decided by Reserve Bank of India time to time.
- When the cash in banks falls below this minimum requirement due to sudden rise in demand caused by either festival season, holidays etc. they need quick supply of cash. Also, during such times, the ATMs need to be fully funded.
- Call money rate is the rate at which short term funds are borrowed and lent in the money market.
- Call money deals with day to day cash requirement of banks. Banks that are faced with cash shortage borrow from other commercial banks for a period of 1-14 days. When banks borrow for one day it is known as call-money. Any money borrowed for more than 1 day but maximum of 14 days is known as notice money.
- The rate at which these transactions take place is known as the call rate. Thus, banks resort to call money to fill temporary mismatches in funds and maintain short term liquidity. It is the central point by which RBI is able to influence interest rates.
- RBI, banks, primary dealers etc are the participants of the call money market. Demand and supply of liquidity affect the call money rate.
- A tight liquidity condition leads to a rise in call money rate and vice versa.