Debt securities form a core part of the financial system, helping governments, banks, and companies raise funds at various maturities. Within this broad category, some instruments are designed specifically for very short-term needs and that’s where money market instruments come in.
Money market instruments are highly liquid, short-term debt instruments that are traded on the money market and have maturities of one year or less. They are used for short-term funding needs or as a secure way for investors to hold excess cash. They are issued by governments, banks, and big businesses. They are regarded as not very risky.
Short maturity, high liquidity, low risk, and consistent returns are important characteristics of money market instruments.
What is Call Money?
Call money is a short-term loan that banks and financial institutions give to each other. It has no fixed repayment date and must be paid back whenever the lender asks. It helps institutions manage extra funds and keeps trading and money market operations running smoothly.
How does call money work?
A short-term loan from one financial institution to another is known as call money. It has no regular payments, in contrast to long-term loans, and the interest rate is known as the call money rate.
In order to keep the financial system liquid, call money and notice money are essential.
They guarantee stable interest rates, continuous banking operations, and a steady flow of credit by assisting banks in effectively managing short-term cash requirements.
Features of the Call Money Market
- Very Short-Term Borrowing (Overnight)
Call money refers to loans borrowed and repaid within one day. Banks use it only to manage immediate liquidity needs, not for long-term funding. - No Collateral Required
These loans are unsecured, meaning no assets are pledged as security. Lenders rely on the creditworthiness of banks and primary dealers, which keeps the risk manageable. - Highly Fluctuating Interest Rates
Call money rates change quickly, sometimes even within the same day.
Rates rise when money is in short supply and fall when money is easily available. - Only Financial Institutions Can Participate
The market is restricted to regulated players such as:
Commercial banks
Cooperative banks
Primary dealers
This limited participation reduces default risk and keeps the market stable.
What is notice money?
The borrowing or lending of money for a brief duration (two to fourteen days) is known as notice money. Banks and other financial institutions lend to one another in order to handle short-term cash needs, such as fulfilling reserve requirements or financing unexpected outflows, in this kind of unsecured loan within the money market.
How does notice money work?
- Participants: Mostly banks and primary dealers.
- Purpose: Banks with extra cash lend to banks that need short-term funds for things like meeting reserve requirements or clearing payments.
- Maturity: Notice money is lent for 2 to 14 days.
Unlike call money, it cannot be taken back instantly; the lender must give a short notice (usually 1 day). - Unsecured: No collateral is involved; banks lend based on trust and creditworthiness.
- Interest Rate: The notice money rate changes daily depending on how much cash is available in the market.
- Process: When a bank has surplus funds, it lends them to another bank that needs short-term money. Both banks agree on the loan period, which ranges from 2 to 14 days, along with the interest rate to be paid. Once the agreed period ends, the borrowing bank repays the loan along with the interest.
Features of notice money
- Maturity: Notice money is meant for very short-term needs. Banks borrow and lend funds for anywhere between 2 to 14 days, making it longer than call money but still highly flexible.
- Requires a Notice Before Recall: Unlike call money (which is repayable on demand), notice money requires the lender to give a notice period usually 1 day, before asking for repayment. This gives the borrower some stability and time to plan.
- High Liquidity: Funds can be moved quickly, making notice money useful for managing day-to-day liquidity, cash mismatches, or temporary funding gaps in banks.
- Unsecured Lending: No collateral is required, so loans are based purely on the borrower’s creditworthiness and reputation. Although unsecured, the risk stays low because only regulated institutions participate.
- Participants: Mainly Scheduled Commercial Banks, Cooperative Banks, and Primary Dealers borrow and lend in this market. Retail investors cannot participate directly. Investors can indirectly invest in money market instruments through mutual funds.
Call and notice money are essential tools that help banks manage short-term liquidity and keep the financial system running smoothly. While not open to individuals, understanding them offers clarity on how day-to-day banking stability and interest rate movements are maintained.
FAQs
Who participates in the call and notice money markets?
Participants in the call and notice money markets primarily include scheduled commercial banks, cooperative banks, and Primary Dealers (PDs), who borrow and lend funds for very short durations (overnight to 14 days) to manage temporary liquidity gaps, often as an interbank market where banks lend to each other
Why do banks borrow in the call or notice money market?
Banks borrow in the call/notice money market primarily to manage short-term liquidity gaps
Is call money risky?
Yes, call money involves certain considerations due to its very short-term nature, absence of collateral, and interest rates that can fluctuate with market conditions, making it important for participants to manage it actively.
Can individuals participate in the call or notice money market?
Yes, individuals can absolutely participate in the call/notice money market indirectly through Money Market Mutual Funds (MMMFs).