Explain the concept of (a) Bank Rate and (b) Call Money Market.

Explain the concept of (a) Bank Rate and (b) Call Money Market. 

Ans. (a) Bank Rate: This is the rate at which RBI lends money to other banks (or financial institutions). The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and viceversa. Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate, the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit. 

(b) Call Money Market: The call money market is a market for trading very short-term liquid financial assets that are readily convertible into cash at low cost. The money market primarily facilitates lending and borrowing of funds between banks and entities like Primary Dealers. An institution which has surplus funds may lend them on an uncollateralized basis to an institution which is short of funds. The period of lending may be for a period of 1 day which is known as call money and between 2 days and 14 days which is known as notice money. Term money refers to borrowing/ lending of funds for a period exceeding 14 days. The interest rates on such funds depend on the surplus funds available with lenders and the demand for the same which remains volatile. This market is governed by the Reserve Bank of India which issues guidelines for the various participants in the call/notice money market. The entities permitted to participate both as lender and borrower in the call/ notice money market are Scheduled Commercial Banks (excluding RRBs), Co operative Banks other than Land Development Banks and Primary Dealers.