CALL MONEY MARKET - Working Capital Management

The call money market consists of overnight money and money at short notice for periods up to 14 days. It essentially serves the purpose of equilibrating the short-term liquidity position of banks. The call money market as a significant component of the money market possesses a few special characteristics, viz:

  1. call money is an instrument for ultra-short period management of funds and is easily reversible,
  2. it is primarily a telephone market and is therefore, administratively convenient to manage for both borrowers and lenders, and
  3. being an instrument of liability management, it provides incremental funds and adds to the size of balance sheets of banks.

From the macro-side, developed call money market helps to smoothen the fluctuation in the reserve – deposit ratios of banks thereby contributing to the stability of the money – multiplier process. A stable money multiplier in turn serves as a reliable means of monetary regulation and policy guide. From the micro angle, short-run borrowing by banks improves the efficiency of funds management in two ways. One way, it enables banks to hold higher reserve deposit ratio than would be possible otherwise. In another way, it allows some banks to permanently increase their pool of investible funds; hence, active well organized call money market improves the funds management practices of banks which in turn further impact on their overall efficiency and profitability.

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