The Reserve Bank of India (RBI) has launched a pilot program for its central bank digital currency (CBDC) in the interbank call money market. Nine banks, including public and private sector banks, are participating in this e-rupee call money pilot.
This marks the second use case for testing wholesale CBDC, with the first being in the government securities market introduced last year. The wholesale CBDC pilot is expected to expand to cover various segments, including asset tokenization and repo transactions. The impact on the call money market is expected to be minimal.
Call Money Market
Q1: What is the Call Money Market?
A1: The Call Money Market is a vital segment of the financial market where banks and financial institutions engage in short-term borrowing and lending of funds among themselves. These transactions have a very short maturity period, often just one day.
Q2: How does the Call Money Market work?
A2: In the Call Money Market, banks borrow or lend funds for a brief period, typically one day, at an agreed-upon interest rate called the "call rate." These transactions are unsecured and are settled either on the same day (T+0) or the next day (T+1).
Q3: What are the key participants in the Call Money Market?
A3: The primary participants in the Call Money Market are commercial banks, cooperative banks, and other financial institutions. They engage in these short-term transactions to manage their daily liquidity requirements.
Q4: What determines the interest rates in the Call Money Market?
A4: The interest rates in the Call Money Market are determined by prevailing market conditions, supply and demand dynamics for funds, and the monetary policy set by the central bank, such as the Reserve Bank of India (RBI) in the case of India.
Q5: What is the significance of the Call Money Market?
A5: The Call Money Market plays a crucial role in the financial system by allowing banks to balance their short-term liquidity needs efficiently. It also serves as an indicator of the prevailing interest rate trends in the economy.
Q6: Are there any risks associated with the Call Money Market?
A6: While the Call Money Market is generally considered safe, it is not entirely risk-free. Market participants face counterparty risk, i.e., the risk that the other party may default on the agreed-upon transaction.
Q7: How does the introduction of central bank digital currency (CBDC) impact the Call Money Market?
A7: The use of CBDC in the Call Money Market, as initiated by the Reserve Bank of India (RBI), can streamline settlement processes and potentially offer benefits like reduced storage costs and tax advantages. However, its overall impact on the market is expected to be minimal.
Q8: Is the Call Money Market related to the broader financial market?
A8: Yes, the Call Money Market is interconnected with the broader financial market. It influences short-term interest rates, which, in turn, affect various financial instruments and lending rates in the economy.
Q9: Are there any restrictions on who can participate in the Call Money Market?
A9: Generally, regulated financial institutions like banks and cooperative banks are the primary participants in the Call Money Market. Individual investors typically do not participate directly in this market.
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