5.or.a Call Money Markets

5.or.
a Call Money Markets

The call money market is an integral part of the Indian Money Market, where the
day-to-day surplus funds (mostly of banks) are traded. The loans are of short-
term duration varying from 1 to 14 days. The money that is lent for one day in
this market is known as "Call Money", and if it exceeds one day (but less than 15
days) it is referred to as "Notice Money". Term Money refers to Money lent for 15
days or more in the InterBank Market. Banks borrow in this money market for
the following purpose:
To fill the gaps or temporary mismatches in funds
To meet the CRR & SLR mandatory requirements as stipulated by the Central
bank
To meet sudden demand for funds arising out of large outflows.
Thus call money usually serves the role of equilibrating the short-term liquidity
position of banks
Call Money Market Participants :
1.Those who can both borrow as well as lend in the market - RBI (through LAF)
Banks, PDs
2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD,
ICICI and mutual funds etc. Reserve Bank of India has framed a time schedule to
phase out the second category out of Call Money Market and make Call Money
market as exclusive market for Bank/s & PD/s.
Interest Rates in Call / Notice Money Markets: Interest rates in these
markets are market determined i.e. by the demand and supply of short term
funds. In India, 80% demand comes from the public sector banks and rest 20%
comes from foreign and private sector banks. Then, around 80% of short term
funds are supplied by Financial Institutions such as IDBI and Insurance giants
such as LIC. Rest 20% of the short term funds come from the banks. Since banks
work as both lenders and borrowers in these markets, they are also known as
Inter-Bank market. The short term fund market in India is located only in big
commercial centres such as Mumbai, Delhi, Chennai and Kolkata. The
intervention of RBI is prominent in the short term funds money market in India.
Call Money / Notice Money market is most liquid money market and is indicator
of the day to day interest rates. If the call money rates fall, this means there is a
rise in the liquidity and vice versa.
5.Or.b-Treasury Bill
A Treasury bill (T-Bill) is a short-term debt obligation backed by the U.S.
government with a maturity of less than one year, sold in denominations of
$1,000 up to a maximum purchase of $5 million. T-bills have
various maturities and are issued at a discount from par. When an investor
purchases a T-Bill, the U.S. government writes an IOU; investors do not receive
regular payments as with a coupon bond, but a T-Bill pays an interest rate.T-Bills
are attractive to investors because they offer a very low-risk way to earn a
guaranteed return on invested money. They benefit the U.S. government
because the government uses the money raised from selling T-bills to fund
various public projects, such as the construction of schools and highways. T-bills
can have maturities of just a few days up to the maximum of 52-weeks, but
common maturities are one month, three months or six months. The longer the
maturity date, the higher the interest rate that the T-Bill will pay to the investor.
Purchase Process: T-bills can be purchased at auctions held by the
government, or investors can purchase T-bills on the secondary market that have
been previously issued. T-Bills purchased at auctions are priced through a
competitive bidding process, at a discount from the par value. When investors
redeem their T-Bills at maturity, they are paid the par value. The difference
between the purchase price and par value is interest. For example, an investor
purchases a par value $1,000 T-Bill for $950. When this T-Bill matures, the
investor is paid $1,000, thereby making $50 on the investment.
Benefits to Investors- There are a number of advantages that T-bills offer to
investors. They are considered low-risk investments because they are backed by
the credit of the U.S. government. With a minimum investment requirement of
just $1,000, and a maximum investment of $5 million, they are accessible by a
wide range of investors. In general, interest income from Treasury bonds is
exempt from state and local income taxes. They are, however, subject to federal
income taxes, and some components of the return may be taxable at
sale/maturity. The main downfall of T-bills is that they offer lower returns than
many other investments, but these lower returns are due to their low risk.
Investments that offer higher returns generally come with more risk.

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