The Reserve Bank of India (RBI) has initiated a pilot program for its central bank digital currency (CBDC) in the interbank call money market. This program includes participation from nine banks, encompassing both public and private sector entities. This marks the second use case for testing wholesale CBDC, the first being in the government securities market, which was introduced last year.
The wholesale CBDC pilot is anticipated to broaden its scope to include various areas such as asset tokenization and repo transactions. Despite these developments, the expected impact on the call money market is minimal. Understanding the Call Money Market is crucial for grasping its significance in the financial ecosystem.
The Call Money Market is an essential segment of the financial market where banks and financial institutions engage in short-term borrowing and lending of funds among themselves. These transactions often have a very short maturity period, typically just one day.
In this market, banks borrow or lend funds for a brief duration, usually one day, at an agreed-upon interest rate known as the "call rate." The transactions are unsecured and are settled either on the same day (T+0) or the following day (T+1).
The primary participants include commercial banks, cooperative banks, and other financial institutions. These entities engage in short-term transactions to effectively manage their daily liquidity requirements.
Interest rates in this market are influenced by prevailing market conditions, the supply and demand for funds, and the monetary policy established by the central bank, specifically the Reserve Bank of India (RBI) in India's context.
This market plays a crucial role in the financial system by facilitating efficient management of banks' short-term liquidity needs. It also serves as an indicator of prevailing interest rate trends within the economy.
While considered relatively safe, the Call Money Market is not devoid of risks. Participants face counterparty risk, which is the risk that the other party may default on the agreed-upon transaction.
The introduction of CBDC in the Call Money Market by the RBI can streamline settlement processes and potentially provide benefits such as reduced storage costs and tax advantages. However, the overall impact on the market is expected to be minimal.
The Call Money Market is interconnected with the wider financial market. It influences short-term interest rates, which in turn impact various financial instruments and lending rates in the economy.
Typically, regulated financial institutions such as banks and cooperative banks are the primary participants. Individual investors generally do not engage directly in this market.
Q1. What is the Call Money Market?
Answer: The Call Money Market is a financial segment where banks lend and borrow funds for short durations, typically one day, to manage liquidity.
Q2. How do interest rates in the Call Money Market get determined?
Answer: Interest rates are influenced by market conditions, supply and demand for funds, and the monetary policy of the Reserve Bank of India.
Q3. Who participates in the Call Money Market?
Answer: Commercial banks, cooperative banks, and other financial institutions are the main participants, primarily to manage their liquidity needs.
Q4. What is the significance of the Call Money Market in the economy?
Answer: It plays a crucial role in managing short-term liquidity and serves as an indicator of interest rate trends within the financial system.
Q5. Does the Call Money Market involve risks?
Answer: Yes, participants face counterparty risks, where one party may default on the transaction, despite the market being generally safe.
Question 1: What is the primary purpose of the Call Money Market?
A) Long-term investments
B) Short-term borrowing and lending
C) Stock trading
D) Real estate transactions
Correct Answer: B
Question 2: Who are the main participants in the Call Money Market?
A) Individual investors
B) Retail customers
C) Commercial banks and financial institutions
D) Government agencies
Correct Answer: C
Question 3: How long is the typical maturity period in the Call Money Market?
A) One week
B) One month
C) One day
D) One year
Correct Answer: C
Question 4: What primarily determines the interest rates in the Call Money Market?
A) Central bank regulations
B) Demand and supply dynamics
C) Historical trends
D) International markets
Correct Answer: B
Question 5: What is a significant risk associated with the Call Money Market?
A) Market volatility
B) Counterparty risk
C) Interest rate risk
D) Inflation risk
Correct Answer: B
Question 6: What is the expected impact of CBDC on the Call Money Market according to the RBI?
A) Significant market disruption
B) Minimal overall impact
C) Increased risks
D) Complete market overhaul
Correct Answer: B
Kutos : AI Assistant!
