Extended trading hours drive call money share to over 3% of money market

Call Money market

The share of call money in the total volume of the money market has risen over 3 percent in the last few days, which experts attributed to the extension of trading time by the Reserve Bank of India (RBI) for the overnight market from July 1.

Experts also said that the rising share indicates that banks are taking a slightly higher interest in deploying funds in the call money market despite the lower returns amid higher surplus liquidity in the banking system.

Last month, the central bank had announced the extension of market trading times of call money, repo and Tri-Party Repo (TREPs). From July 1, market timings for call money has been extended to 7:00 PM.

“With liquidity in huge surplus, banks and financial institutions are seen increasing their deployment of funds in call money. The extended trading window has made this option even more attractive,” said a senior treasury official at a state-owned bank.

Historically, the share of call money volumes in the total turnover has remained in the range of 2-2.5 percent. However, in some instances, the share has increased to 3 percent due to higher demand for funds. Such situations arise especially at the end of the quarter or of the month, when the demand for funds are high.

A decade ago, the share was around 20 percent, which gradually came down due to several factors, such as increased participation in collateralised lending and borrowing, particularly by mutual funds and insurance companies, and regulatory changes.

According to the RBI’s data, the share of call money in the total money market volumes remained in the range of 2.92-3.34 percent between July 16 and July 21.

The data further showed that volumes of call money remained in the range of Rs 15,000 crore -19,000 crore between July 16 and July 21. Whereas total money market volumes remained in the range of Rs 5.9 lakh crore-6.2 lakh crore in the same period.

Will this help in policy rate transmission?

Market participants have said that the higher volumes in the call money market will help the better transmission of rates in the financial system. This is because, with more transactions, the call money rate becomes a better benchmark for short-term borrowing costs. So, when the central bank changes the policy rate, the call money rate adjusts faster and more accurately, helping other interest rates in the economy follow the suit.

Further, the higher volumes also indicate that the reliance on the RBI’s liquidity window has come down. This makes the overall system more responsive to policy changes.

However, in the current situation, the higher surplus liquidity is keeping overnight rates sharply below the repo rate. The central bank’s variable rate reverse repo auction has helped the rate align slightly closer to the repo rate.