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Unit 3: Financial Markets

order to save interest on cash credits and overdrafts. Among these uses, interbank loan has been Notes
the most predominant. Banks borrow from other banks to meet a sudden demand for funds,
make large payments, large remittances, and to maintain cash with the RBI. To the extent, call
loans that are given in India to security brokers tantamount to "outside" interbank loans in the
UK. To the extent call money is used in India, it is akin to federal funds in the US and to the extent
the call money is provided to security brokers, it tantamounts to call loans proper in the US.
Maturity period of call loans varies between one day to a fortnight while notice money deals in
funds for 2-14 days.
Call loans are unsecured in India, unlike in other countries. Further, trading on the call money
market is seasonal in character as is reflected in the volume of money at call and short notice.
Thus, demand of money at call market is less during slack season as compared to that during
busy season in a year. It is generally found that borrowings from call market tend to be highest
around March every year ostensibly due to withdrawals of deposits in March to meet year-end
tax payments and withdrawals of funds by financial institutions to meet their statutory
obligations.
Call money markets are located mainly in high industrial and commercial centres like Mumbai,
Kolkata, Chennai, Delhi and Ahmedabad. Among these, the Mumbai call market is the biggest
both in terms of size and buoyancy. This is primarily because head offices of all the premier
banks, the RBI, LIC and UTI are situated there. It has also the biggest stock exchange and highly
developed communication system. The call money markets at Delhi, Kolkata, Chennai and
Ahmedabad are geographically dispersed due to which different call rates prevail in these
markets.

In addition to the above, there exists a large number of local call markets developed and operated
by indigenous local bankers.

3.5.2 Term Money Market

The term ‘money market’ is another segment of the uncollateralised money market which deals
with financial transactions of short-term duration ranging from 15 days to one year. This market
has been somewhat dormant in India. It was also a strictly regulated market up to the late 1980s
with the ceiling rates of interest (10.5-11.5%) across the various maturity periods. Historically,
statutory pre-emptions on interbank liabilities regulated interest rate structure, cash credit
system of financing, high degree of volatility in the call money rates, availability of sector-
specific refinance, inadequate Asset Liability Management (ALM) discipline among banks and
scarcity of money market instruments of varying maturities were cited as the main factors that
inhibited the development of the term money market.

3.5.3 Treasury Bill Market

Treasury bill market deals with instruments of short-term borrowing of the government. It
plays a vital role in cash management of the government. Being risk-free, their yields at varied
maturities serve as short-term benchmarks and help pricing varied floating rate products in the
market. Treasury Bills market has been most preferred by central banks for market interventions
to influence liquidity and short-term interest rates, generally combined with repos/reverse
repos.
There was an active Treasury Bills market in India's bank's history before the 1960s when 91-
days Treasury Bills were auctioned weekly and the bills were widely held in the market. In the
mid-1950s, the system of ad hoc 91-days Treasury Bills was introduced to replenish on automatic
basis, the Central Government's cash balance with the RBI to restore to its minimum required
level which opened up the era of uncontrolled monetisation of the central government's deficit.

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