Reasons for fluctuation in the Call Money Market

sunandaC

New member
Reasons for fluctuation in the Call Money Market

The extreme volatility of call rate can be attributed to factors such as the following:

1. Large borrowings on certain dates by banks to meet the CRR requirement and sharp reduction in demand for call money once the CRR needs are met. The call rates rise sharply in the first week of the reporting fortnight, and subside in the second week when banks have covered their cash reserve requirements.

2. The credit operations of certain banks tend to be much in excess of their own resources. These banks with over-extended credit positions treat call market as a source of funds for meeting structural disequilibria in their sources and uses of funds.

3. The occasional factors in the market also affect the volatility. For Example, in the recent past, the call rate shot up due to disruption in the banking industry.

4. The withdrawal of funds by institutional lenders to meet their business needs, and by the corporate sector for payment of advance tax leads to steep increase in the call rate.

5. The liquidity crisis in the money markets also contributes to the call rate volatility. Banks invest funds (when call market is easy) in government securities, units and public sector bonds in order to maximize their earnings from their funds management. But with no buyers in the markets, these instruments tend to become illiquid which accentuates liquidity crisis in the call market pushing up the call rate significantly.

6. The mismatch between the assets and liabilities of commercial banks arising out of massive demand for non-food credit as against sluggish growth in bank deposits is another relevant factor.

7. In the recent past the forex market and the call money market have become quite closely inter-linked; the changes in the former affect the latter significantly. The sharp increase in the call rate on November 3 1995 and between the middle of February to the middle of March 1996 were largely due to the turbulences in the forex market, and the RBI intervention in the forex market. The RBI intervention to prevent the unusual depreciation of the rupee and the temporary withdrawal of the money market support so as to first stabilize the forex markets have become important factors behind the flaring of call rates in the recent past.

8. The technical modalities of the calculation of reserve requirements also lead to sharp swings in the call rate.

9. The structural deficiencies in the banking system and the practice of banks to window dress their deposits also have been important contributory factors in this context. The banking system tries to build up the deposits towards the end of the year and in some cases, an increase in deposits in the week towards the end of the year is greater than an increase in them in the whole year.

It may be noted that the exorbitant rise in call rates and the volatility in these rates could not be contained in spite of:


1. Intervention by the DFHI,

2. Channelisation of more funds by the RBI through the DFHI and

3. Channelisation of funds by certain financial institutions with surplus funds



The increase in the number of participants and the softening of the penalties on CRR shortfalls have not helped much to moderate interest rate volatility in the call money market.

It has been the policy of RBI to help the call money market to achieve a state of stability. If the forex market turbulence does not compel it to withdraw support from or to cease to intervene in the call market. For example, the money market support by the RBI coupled with the reduction in reserve requirements, and enhancement of limits for the banks under the governments securities refinance facility, had helped to moderate the call rate changes in the last quarter of 1995.

The spot foreign exchange purchase by the RBI had helped to ease the call rates in the middle of March 1996. The resumption of repo auctions by it in November 1996 had provided a reasonable floor to the call money rates, and an avenue for banks to park their funds.
 

rosemarry2

MP Guru
Reasons for fluctuation in the Call Money Market

The extreme volatility of call rate can be attributed to factors such as the following:

1. Large borrowings on certain dates by banks to meet the CRR requirement and sharp reduction in demand for call money once the CRR needs are met. The call rates rise sharply in the first week of the reporting fortnight, and subside in the second week when banks have covered their cash reserve requirements.

2. The credit operations of certain banks tend to be much in excess of their own resources. These banks with over-extended credit positions treat call market as a source of funds for meeting structural disequilibria in their sources and uses of funds.

3. The occasional factors in the market also affect the volatility. For Example, in the recent past, the call rate shot up due to disruption in the banking industry.

4. The withdrawal of funds by institutional lenders to meet their business needs, and by the corporate sector for payment of advance tax leads to steep increase in the call rate.

5. The liquidity crisis in the money markets also contributes to the call rate volatility. Banks invest funds (when call market is easy) in government securities, units and public sector bonds in order to maximize their earnings from their funds management. But with no buyers in the markets, these instruments tend to become illiquid which accentuates liquidity crisis in the call market pushing up the call rate significantly.

6. The mismatch between the assets and liabilities of commercial banks arising out of massive demand for non-food credit as against sluggish growth in bank deposits is another relevant factor.

7. In the recent past the forex market and the call money market have become quite closely inter-linked; the changes in the former affect the latter significantly. The sharp increase in the call rate on November 3 1995 and between the middle of February to the middle of March 1996 were largely due to the turbulences in the forex market, and the RBI intervention in the forex market. The RBI intervention to prevent the unusual depreciation of the rupee and the temporary withdrawal of the money market support so as to first stabilize the forex markets have become important factors behind the flaring of call rates in the recent past.

8. The technical modalities of the calculation of reserve requirements also lead to sharp swings in the call rate.

9. The structural deficiencies in the banking system and the practice of banks to window dress their deposits also have been important contributory factors in this context. The banking system tries to build up the deposits towards the end of the year and in some cases, an increase in deposits in the week towards the end of the year is greater than an increase in them in the whole year.

It may be noted that the exorbitant rise in call rates and the volatility in these rates could not be contained in spite of:


1. Intervention by the DFHI,

2. Channelisation of more funds by the RBI through the DFHI and

3. Channelisation of funds by certain financial institutions with surplus funds



The increase in the number of participants and the softening of the penalties on CRR shortfalls have not helped much to moderate interest rate volatility in the call money market.

It has been the policy of RBI to help the call money market to achieve a state of stability. If the forex market turbulence does not compel it to withdraw support from or to cease to intervene in the call market. For example, the money market support by the RBI coupled with the reduction in reserve requirements, and enhancement of limits for the banks under the governments securities refinance facility, had helped to moderate the call rate changes in the last quarter of 1995.

The spot foreign exchange purchase by the RBI had helped to ease the call rates in the middle of March 1996. The resumption of repo auctions by it in November 1996 had provided a reasonable floor to the call money rates, and an avenue for banks to park their funds.
Hey sunanda,

Here I am uploading Fluctuations in Inter Bank Call Money Market, so please download and check it.
 

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