Price Discovery in the Call Money Market
The price i.e. the interest rate in the call money market is primarily determined by the Demand & Supply of funds by various participants such as Banks, Primary Dealers, Mutual Funds, Insurance Companies & others.
Price is a function of General Interest rate, Inflation rate, exchange rate, Government Policies, Monetary Policy & Fiscal Conditions of the country.
Price = Fn {Interest rate, Inflation rate, exchange rate, Government Policies, Monetary Policy, Fiscal Conditions}
The borrower & the lender quote their own rates (borrowing & lending rate) but the transaction takes place at the rate negotiated between them Over The Counter (OTC).
The total call loans in India increased from Rs. 9.3 crores in 1955-56 to Rs. 7,147 crore in
1995-96. But these figures truly do not reflect the extent of activity or the total volume of business in the call market because they are outstanding amounts on the last Friday / last reporting Friday of the year. The size of the call market can be gauged more realistically with the help of information on the total turn over (borrowings) in the market, which has been quite sizeable.
It was Rs. 16, 450 billion in 1991-92, Rs. 22,510 billion in 1993-94, Rs.17, 030 billion in 1994-95, Rs. 20,980 billion in 1995-96, and Rs. 15, 450 billion in 1995-96. on the whole the available statistics show that, on an average, the daily turn over in the call market has been around Rs. 6000 crore during 1991-97. This size appears to be too high if we remember that the call market is supposed to be a mechanism to smoothen or even out temporary surpluses and deficits in the banking system.
The daily average borrowings by all banks and PDs were Rs. 9,465 crore during the fortnight ended March 29, 1996 and Rs. 10,203 crore during the fortnight ended March 28, 1997. The daily average lendings by banks, financial institutions, PDs, and mutual funds were Rs. 8901 crore and Rs. 9289 crore respectively during the periods just mentioned. Within the banking system, public sector banks were net lenders in 1996-97 with an average daily net lending of Rs. 2,088 crore, while they were net borrowers in 1995-96.
Foreign banks were net borrowers during 1995-96 as well as in 1996-97 with their average daily borrowings of Rs. 2531 crore during the fortnight ended March 29, 1996 and Rs. 3807 crore during the fortnight ended March 28, 1997. PDs and private sector banks also were net borrowers in the call market in 1996-97. The average daily lendings of non-bank FIs were Rs. 5492 crore and Rs. 3408 crore respectively during 1995-96 and 1996-97. The aggregate lendings by the DFHI in this market was Rs. 5540 billion and Rs. 4280 billion in 1995-96 and 1996-97, respectively. In the case of STCI, the cumulative turnover (borrowings and lendings) was Rs. 1499 billion and Rs. 2743 billion in 1995-96 and 1996-97 respectively.
The size of the call market in India has been smaller as compared to the market in UK and US. This could have been due to the following factors.
1. The bill market in India is underdeveloped and so the call loans to the bill market cannot but be small. The volume of call loans depends upon the extend of trading in the bills of exchange, treasury bills and so on. Whenever these markets are developed, the amount of call loans demanded and supplied is also large. In addition, banks in India are not inclined to offer loans to brokers and dealers in bills and securities.
2. Unlike, in the UK, direct discounting facilities with the RBI are available to banks as result of which they have much less need for loans from the money market. Further, Indian commercial banks hold fairly large cash reserves; therefore, their need to borrow in the call market is much less.
3. Unlike, in the US loans to security dealers cannot be large for certain reasons.
Government securities are directly sold by the RBI or to the RBI without much intervention by brokers and dealers. The volume of industrial securities traded on the stock exchanges is also relatively small.
Further, any large-scale financial support by banks to stock exchanges cannot be appreciated in the Indian milieu. There are also several regulations that have been imposed by RBI on banks in respect of advances against shares. Therefore, members using funds that are mostly derived from the private sources undertake much of the trading activity on the stock exchanges in India.
Variations in the volume of demand for and supply of call loans are caused by many factors. The resources position of the banking system in a given period is important in this regard.
The most significant factor determining the resources position of the banking system is the extent of deposits accrual. Increase in deposits with banks, other things being equal, would induce banks to explore opportunities of investment. Since call loans are 1 of the avenues for investment, the supply of call loans would increase when there is an increase in deposits. It is to be noted that if deposits accrue to all the banks, it is unlikely that inter-bank call loan would increase.
In a case such as this, the supply of funds to the outside (of the banking system) borrowers would increase. One can, however, visualize a differential growth in the deposits of different banks as result of which the volume of inter-bank call loans would tend to increase.
The demand for call loans would depend upon the buoyancy of the stock market and the increase in the demand for loans for industrial and commercial purposes. The size of call loans is also determined by the possibility of quick investment or liquidation of government securities, treasury bills and other short-term investments. It has been observed that, when subscriptions to government loans open, the demand for call loans tends to increase.
Demand for call loans tends to broaden in December, March, June i.e. when quarterly advance tax payments are to be made. The speed with which remittance and clearance system in the country works also has a great determining impact on the day-to-day volume of call loans. The policy of RBI in respect of its loans to banks and the implementation of the reserve ratio requirement is another important factor having a bearing on the banks decision to borrow in the call market.
When the banks have a liberal access on cheap terms to the discount window of the RBI, their need to resort to the call market would be relatively less. On the other hand, in the period of restrictive monetary policy, banks would attempt to utilize their resources among themselves more efficiently.
Similarly, it has been observed that the system of maintaining reserves on a weekly basis, coupled with the manipulation of the statutory liquidity ratio makes banks operate in the call market as lenders and borrowers. In addition, the pressure on the market reaches a peak towards the end of the banking week, i.e. on Friday when there is a scramble for funds to make up the shortfall in the amount of required reserves. The foreign exchange market activity has also become a significant determinant of the call market activity in India in recent years.
The price i.e. the interest rate in the call money market is primarily determined by the Demand & Supply of funds by various participants such as Banks, Primary Dealers, Mutual Funds, Insurance Companies & others.
Price is a function of General Interest rate, Inflation rate, exchange rate, Government Policies, Monetary Policy & Fiscal Conditions of the country.
Price = Fn {Interest rate, Inflation rate, exchange rate, Government Policies, Monetary Policy, Fiscal Conditions}
The borrower & the lender quote their own rates (borrowing & lending rate) but the transaction takes place at the rate negotiated between them Over The Counter (OTC).
The total call loans in India increased from Rs. 9.3 crores in 1955-56 to Rs. 7,147 crore in
1995-96. But these figures truly do not reflect the extent of activity or the total volume of business in the call market because they are outstanding amounts on the last Friday / last reporting Friday of the year. The size of the call market can be gauged more realistically with the help of information on the total turn over (borrowings) in the market, which has been quite sizeable.
It was Rs. 16, 450 billion in 1991-92, Rs. 22,510 billion in 1993-94, Rs.17, 030 billion in 1994-95, Rs. 20,980 billion in 1995-96, and Rs. 15, 450 billion in 1995-96. on the whole the available statistics show that, on an average, the daily turn over in the call market has been around Rs. 6000 crore during 1991-97. This size appears to be too high if we remember that the call market is supposed to be a mechanism to smoothen or even out temporary surpluses and deficits in the banking system.
The daily average borrowings by all banks and PDs were Rs. 9,465 crore during the fortnight ended March 29, 1996 and Rs. 10,203 crore during the fortnight ended March 28, 1997. The daily average lendings by banks, financial institutions, PDs, and mutual funds were Rs. 8901 crore and Rs. 9289 crore respectively during the periods just mentioned. Within the banking system, public sector banks were net lenders in 1996-97 with an average daily net lending of Rs. 2,088 crore, while they were net borrowers in 1995-96.
Foreign banks were net borrowers during 1995-96 as well as in 1996-97 with their average daily borrowings of Rs. 2531 crore during the fortnight ended March 29, 1996 and Rs. 3807 crore during the fortnight ended March 28, 1997. PDs and private sector banks also were net borrowers in the call market in 1996-97. The average daily lendings of non-bank FIs were Rs. 5492 crore and Rs. 3408 crore respectively during 1995-96 and 1996-97. The aggregate lendings by the DFHI in this market was Rs. 5540 billion and Rs. 4280 billion in 1995-96 and 1996-97, respectively. In the case of STCI, the cumulative turnover (borrowings and lendings) was Rs. 1499 billion and Rs. 2743 billion in 1995-96 and 1996-97 respectively.
The size of the call market in India has been smaller as compared to the market in UK and US. This could have been due to the following factors.
1. The bill market in India is underdeveloped and so the call loans to the bill market cannot but be small. The volume of call loans depends upon the extend of trading in the bills of exchange, treasury bills and so on. Whenever these markets are developed, the amount of call loans demanded and supplied is also large. In addition, banks in India are not inclined to offer loans to brokers and dealers in bills and securities.
2. Unlike, in the UK, direct discounting facilities with the RBI are available to banks as result of which they have much less need for loans from the money market. Further, Indian commercial banks hold fairly large cash reserves; therefore, their need to borrow in the call market is much less.
3. Unlike, in the US loans to security dealers cannot be large for certain reasons.
Government securities are directly sold by the RBI or to the RBI without much intervention by brokers and dealers. The volume of industrial securities traded on the stock exchanges is also relatively small.
Further, any large-scale financial support by banks to stock exchanges cannot be appreciated in the Indian milieu. There are also several regulations that have been imposed by RBI on banks in respect of advances against shares. Therefore, members using funds that are mostly derived from the private sources undertake much of the trading activity on the stock exchanges in India.
Variations in the volume of demand for and supply of call loans are caused by many factors. The resources position of the banking system in a given period is important in this regard.
The most significant factor determining the resources position of the banking system is the extent of deposits accrual. Increase in deposits with banks, other things being equal, would induce banks to explore opportunities of investment. Since call loans are 1 of the avenues for investment, the supply of call loans would increase when there is an increase in deposits. It is to be noted that if deposits accrue to all the banks, it is unlikely that inter-bank call loan would increase.
In a case such as this, the supply of funds to the outside (of the banking system) borrowers would increase. One can, however, visualize a differential growth in the deposits of different banks as result of which the volume of inter-bank call loans would tend to increase.
The demand for call loans would depend upon the buoyancy of the stock market and the increase in the demand for loans for industrial and commercial purposes. The size of call loans is also determined by the possibility of quick investment or liquidation of government securities, treasury bills and other short-term investments. It has been observed that, when subscriptions to government loans open, the demand for call loans tends to increase.
Demand for call loans tends to broaden in December, March, June i.e. when quarterly advance tax payments are to be made. The speed with which remittance and clearance system in the country works also has a great determining impact on the day-to-day volume of call loans. The policy of RBI in respect of its loans to banks and the implementation of the reserve ratio requirement is another important factor having a bearing on the banks decision to borrow in the call market.
When the banks have a liberal access on cheap terms to the discount window of the RBI, their need to resort to the call market would be relatively less. On the other hand, in the period of restrictive monetary policy, banks would attempt to utilize their resources among themselves more efficiently.
Similarly, it has been observed that the system of maintaining reserves on a weekly basis, coupled with the manipulation of the statutory liquidity ratio makes banks operate in the call market as lenders and borrowers. In addition, the pressure on the market reaches a peak towards the end of the banking week, i.e. on Friday when there is a scramble for funds to make up the shortfall in the amount of required reserves. The foreign exchange market activity has also become a significant determinant of the call market activity in India in recent years.