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Sunanda K. Chavan
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Call Rates - September 16th, 2010

Call Rates

The rate of interest paid on call loans is known as call rate. The call rate is highly variable from day to day and often from hour to hour. It varies from center to center also. It is very sensitive to changes in demand for and supply of call loans.

The call rate in India used to be determined by the market forces till 1973. on account of the RBI’s policy of credit squeeze introduced in May 1973 in the form of raising the bank rate and tightening of refinance and rediscount facilities, the call rate had reached as high a level as 30% in December 1997. as this was truly an alarming level for any short-term rate of interest to reach, and as banks defaulted in a major way in respect of cash and liquidity requirements at that time due to the prohibitively high cost of call money, it became necessary to regulate call rates within a reasonable limit.

Therefore, the Indian Banks Association (IBA) in 1973 fixed a ceiling of 15 % on the level of call rate. This was a sort of informal arrangement for regulating the level of interest rate and had no legal sanction. Since then, the IBA lowered this ceiling of 15 % to 12.5% in March 1976, 10% in June 1977 and 8.6% in March 1978, and 10% in April 1980. The actual level of call rate in India since 1973 had remained within the ceiling fixed by the IBA from time to time. Many large banks had been unable to get funds due to the ceiling rate in the call market. Subsequently, the call rate was freed from the ceiling in 2 stages: Effective from October 1988, the operations of DFHI was exempted from the ceiling.

Further, with effect from May 1, 1989 the ceilings on the call rate and the inter-bank term money rate were withdrawn. As a result, the call rate has been freely determined by the market forces since 1989. There are now 2 call rates in India:
1. The inter-bank call rate and
2. The lending rate of DFHI in the call market.

Among three important centers- Mumbai, Calcutta and Chennai- the call rate is usually the highest in Calcutta and lowest in Mumbai. The relatively higher rate in Calcutta may be due to the fact that the demand for funds there is greater than the supply compared to the situation in Mumbai. The supply of call loans in Mumbai is greater owing to the location of head offices of not only many banks but also of several other non-banking financial institutions like LIC and UTI.

On the other hand, the demand for funds in Calcutta is greater because the volume of trade there is greater. Not only is the demand greater, but also it is concentrated because of large number of commodities dealt in and the overlapping of seasons. The trading in commodities like jute, tea and coal absorbs a large amount of funds. Also, contacts between the indigenous bankers and the organized money market in Calcutta are relatively weak. This results in a smaller flow of funds across markets, leading to a increase in interest rates.

In a perfect market, differences in call rates at different centers should not have persisted over such a long period of time. In theory, funds should have flown from Mumbai to Calcutta, making the interest rates equal.

Why this has not been so may be explained in terms of 2 related factors:
1. The rate differential is not really great and
2. The cost of transfer of funds would wipe out the rate differential.

The call rate in Calcutta has exceeded the call rate in Mumbai mostly by 0.5 % points. This difference is not sufficient to meet the cost of transfer of funds. In any case, the computerization of banking appears to have reduced inter-city differentials in the call rate. The call money rate generally moves in sympathy with the rate for demand loans (demand loan rate is the rate at which the SBI grants accommodation to commercial banks) but it is almost always lower than the latter. The difference between the demand loan rate and the call rate has tended to widen over the years.

As borrowing from the RBI constitutes an important alternative source of accommodation for banks, the relation between the bank rate and the call rate is significant. In the US, till 1963, the price of federal funds did not rise very much above the discount rate of the Federal Reserve System, after which the federal funds rate has tended to keep close to or above the official discount rate. In India, except in 1955-56, the call rate (Mumbai) has exceeded the bank rate till 1975-76, after which it has been sometimes been higher and sometimes lower than the bank rate.

The DFHI call-lending rate has usually been much higher than the average inter-bank call rate. The range of variations in the former also has been greater than that of the latter, while the average inter-bank rate has varied between 6.99 % to 19.57 %, the DFHI rate has varied between 3.66 % to 30.63 %, during 1990-91 to 1996-97. The call rate has fluctuated between 1.05% to 40.28 % during 1991-92 to 1996-97. The call rate has reached the level of 100 %, once in 1990-91 and within a single CRR fortnight, intra-day variations in it were more than 10 % points. On November 3 1995 it reached the level of 85 %.
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Rose Marry
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Re: Call Rates - April 13th, 2016

Quote:
Originally Posted by sunandaC View Post
Call Rates

The rate of interest paid on call loans is known as call rate. The call rate is highly variable from day to day and often from hour to hour. It varies from center to center also. It is very sensitive to changes in demand for and supply of call loans.

The call rate in India used to be determined by the market forces till 1973. on account of the RBIs policy of credit squeeze introduced in May 1973 in the form of raising the bank rate and tightening of refinance and rediscount facilities, the call rate had reached as high a level as 30% in December 1997. as this was truly an alarming level for any short-term rate of interest to reach, and as banks defaulted in a major way in respect of cash and liquidity requirements at that time due to the prohibitively high cost of call money, it became necessary to regulate call rates within a reasonable limit.

Therefore, the Indian Banks Association (IBA) in 1973 fixed a ceiling of 15 % on the level of call rate. This was a sort of informal arrangement for regulating the level of interest rate and had no legal sanction. Since then, the IBA lowered this ceiling of 15 % to 12.5% in March 1976, 10% in June 1977 and 8.6% in March 1978, and 10% in April 1980. The actual level of call rate in India since 1973 had remained within the ceiling fixed by the IBA from time to time. Many large banks had been unable to get funds due to the ceiling rate in the call market. Subsequently, the call rate was freed from the ceiling in 2 stages: Effective from October 1988, the operations of DFHI was exempted from the ceiling.

Further, with effect from May 1, 1989 the ceilings on the call rate and the inter-bank term money rate were withdrawn. As a result, the call rate has been freely determined by the market forces since 1989. There are now 2 call rates in India:
1. The inter-bank call rate and
2. The lending rate of DFHI in the call market.

Among three important centers- Mumbai, Calcutta and Chennai- the call rate is usually the highest in Calcutta and lowest in Mumbai. The relatively higher rate in Calcutta may be due to the fact that the demand for funds there is greater than the supply compared to the situation in Mumbai. The supply of call loans in Mumbai is greater owing to the location of head offices of not only many banks but also of several other non-banking financial institutions like LIC and UTI.

On the other hand, the demand for funds in Calcutta is greater because the volume of trade there is greater. Not only is the demand greater, but also it is concentrated because of large number of commodities dealt in and the overlapping of seasons. The trading in commodities like jute, tea and coal absorbs a large amount of funds. Also, contacts between the indigenous bankers and the organized money market in Calcutta are relatively weak. This results in a smaller flow of funds across markets, leading to a increase in interest rates.

In a perfect market, differences in call rates at different centers should not have persisted over such a long period of time. In theory, funds should have flown from Mumbai to Calcutta, making the interest rates equal.

Why this has not been so may be explained in terms of 2 related factors:
1. The rate differential is not really great and
2. The cost of transfer of funds would wipe out the rate differential.

The call rate in Calcutta has exceeded the call rate in Mumbai mostly by 0.5 % points. This difference is not sufficient to meet the cost of transfer of funds. In any case, the computerization of banking appears to have reduced inter-city differentials in the call rate. The call money rate generally moves in sympathy with the rate for demand loans (demand loan rate is the rate at which the SBI grants accommodation to commercial banks) but it is almost always lower than the latter. The difference between the demand loan rate and the call rate has tended to widen over the years.

As borrowing from the RBI constitutes an important alternative source of accommodation for banks, the relation between the bank rate and the call rate is significant. In the US, till 1963, the price of federal funds did not rise very much above the discount rate of the Federal Reserve System, after which the federal funds rate has tended to keep close to or above the official discount rate. In India, except in 1955-56, the call rate (Mumbai) has exceeded the bank rate till 1975-76, after which it has been sometimes been higher and sometimes lower than the bank rate.

The DFHI call-lending rate has usually been much higher than the average inter-bank call rate. The range of variations in the former also has been greater than that of the latter, while the average inter-bank rate has varied between 6.99 % to 19.57 %, the DFHI rate has varied between 3.66 % to 30.63 %, during 1990-91 to 1996-97. The call rate has fluctuated between 1.05% to 40.28 % during 1991-92 to 1996-97. The call rate has reached the level of 100 %, once in 1990-91 and within a single CRR fortnight, intra-day variations in it were more than 10 % points. On November 3 1995 it reached the level of 85 %.
Hey friend,

Here I am sharing Rate List of ISD Call Charges, so please download and check it.
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File Type: pdf Rate List of ISD Call Charges.pdf (480.6 KB, 0 views)
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