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Business Standard

Co-op bank call market activity rebounds after RBI platform directive

Participation of co-operative banks in the call money market declined sharply following the Reserve Bank of India's directive mandating NDS-CALL platform membership for call market transactions. However, activity has rebounded in recent months, indicating a rise in membership among co-operative banks, according to a report in the Reserve Bank of India's monthly bulletin. 'Co-operative banks' participation in the call money market decreased significantly after the Reserve Bank's directive for mandatory membership on the NDS-CALL trading platform for call money market activity. It has, however, rebounded in recent months, suggesting an increase in membership of co-operative banks,' the report said. Call money transactions are executed either through the Negotiated Dealing System – Call (NDS-CALL) platform, a screen-based, quote-driven electronic trading system operated by the Clearing Corporation of India Limited (CCIL), or through bilateral communication outside the platform. Transactions carried out directly on the NDS-CALL platform are classified as traded deals, while those negotiated off-platform but subsequently reported by participants are referred to as reported deals. Entities that are not members of the NDS-CALL platform are required to report their transactions directly to the RBI. The report highlighted that the share of reported deals in the overall call money market has declined significantly following the RBI's Master Direction issued on April 1, 2021, and the subsequent notification by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) on September 29, 2022. These directives required all eligible participants in the call, notice and term money markets to obtain membership of the NDS-CALL platform within a specified timeframe, effectively shifting market activity towards the formal trading system. The volume of transactions in the call money market is influenced by a range of factors including liquidity conditions, regulatory timings, policy events and cross-currency arbitrage opportunities. The report said that typically, a widening spread between the weighted average call rate (WACR) and the policy repo rate signals increased demand for reserves, leading to a rise in overnight call volumes. 'The call money market being the primary avenue for banks to transact in reserves and the policy repo rate being the midpoint of the LAF corridor, a rise in the spread of the WACR over the repo rate is usually associated with an increase in the overnight call volume as it indicates a heightened demand for reserves,' the report said. Further, during the COVID-19 pandemic, truncated trading hours imposed by the central bank led to a decline in market activity, with volumes expectedly lower during shorter sessions. Meanwhile, the call market also sees a pickup in activity around the RBI's monetary policy announcements, as banks rebalance their reserve positions in response to policy uncertainty. 'Activity in the call market is expected to spike on the days of the RBI's monetary policy announcement as banks may choose to re-position their reserve balances ahead of or post the Monetary Policy Committee (MPC) decision,' the report said. Additionally, the report highlighted that divergences between short-term USD/INR forward premia and the corresponding interest rate differentials can drive arbitrage-led transactions. Such misalignments encourage banks to borrow or lend in the call market, depending on the direction of the premium gap, thereby impacting call money volumes.