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Informist, Wednesday, Jul. 23, 2025

NEW DELHI – The divergence of overnight dollar/rupee forward premia from the interest rate differential leads to an increase in the call money market volumes, which suggests banks take advantage of the arbitrage offered between the markets, a paper by Reserve Bank of India staff said. The net liquidity injection and the spread of the weighted average call rate over the repo rate also show a statiscally significant impact on call market volumes, according to the paper published in the monthly bulletin for July.

A reduction in liquidity in the banking system leads to an increase in call money market volumes, and vice versa, as banks redistribute limited available reserves between each other, the paper said. The conclusions are based on data from the call money market compiled between 2019 and 2024, not counting working Saturdays when volumes are not representative. The paper further said the collateralised and uncollateralised segments on the money markets are supplementary to each other, showing a negative correlation in volumes.

Truncated trading hours during and in the aftermath of the COVID-19 pandemic, as well as the RBI's directive in April 2021 that limited members of the Clearing Corp. of India's Negotiated Dealing System – Call, reduced the transaction volumes in the uncollateralised money market, as anticipated, the RBI staff said. However, monetary policy announcements have no impact on call market volumes, the data shows.

"While trade volumes in the collateralised segment far surpass those in the unsecured interbank market...the weighted average call rate remains the operating target of the RBI's monetary policy as this is a segment that purely deals in central bank reserves, which monetary policy actions can directly control," the paper said. "Therefore, it is important from the policy perspective to understand the determinants of the volume in the Call market."

The transacted value in the call money market has nearly halved during the period considered by the study. With the growth of the collateralised market, the share of call money volumes in overall money market volumes fell to 2% in December from 10% in January 2019. Even within call money, term and notice money markets remain minuscule despite the RBI's steps to develop the markets, making up only 6% on the volumes during the five-year period.

Standalone primary dealers accounted for 59% of the borrowing volumes in the call money market during the five-year period. In 2024, primary dealers accounted for around 80% of the borrowing volumes, while co-operative banks were the largest lenders with around 50% of the average monthly volumes.

"Co-operative banks participation in call money market decreased significantly after the Reserve Bank's directive for mandatory membership on NDS-CALL trading platform for call money market activity," the paper said. "It has, however, rebounded in the recent months, suggesting an increase in membership of cooperative banks."

State-owned and private sector banks made up around 20% each of the lending volume, with the remainder being others. Neither segment accounted for more than 10% of the borrowing volumes in 2024. Most call money volumes remain on the CCIL's platform while the share of reported deals that are struck outside of the NDS-CALL mechanism has gone down sharply since 2021.  End

Reported by Aaryan Khanna

Edited by Ashish Shirke

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