Indian Money market instruments - Repo & Call

Repurchase Agreement (Repo) is an instrument for borrowing funds by selling securities with an agreement to repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed.
The reverse of the repo transaction is called ‘reverse repo’ which is lending of funds against buying of securities with an agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.

It can be seen from the definition above that there are two legs to the same transaction in a repo/ reverse repo. The duration between the two legs is called the ‘repo period’. Predominantly, repos are undertaken on overnight basis. Settlement of repo transactions happens along with the outright trades in government securities. Repo that are not overnight termed as Term Repo.

Earlier repo securities in corporate debt allowed except CPs, CDs and NCDs maturing in less than one year. But from Jan 2013 RBI also permitted repo these securities. Only listed corporate debt securities that AA or above rated are eligible to be used for repo.

However volume in "Repo in corporate debt" is very less. This can be due to sharp haircut ,10% -12%-15%, while in CBLO haircuts are 5%. Also in  "Repo in corporate debt" market pricing is not based on online platform but lender needs to find out the borrower while in CBLO market pricing is determined through online ask - bid spreads.

RBI has permitted select entities (scheduled commercial banks excluding RRBs and LABs, PDs, all-India FIs, NBFCs, mutual funds, housing finance companies, insurance companies) to undertake repo in both the repo market.

Call/Notice/Term  Money - 

The call/notice/term 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 depends 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.

Scheduled commercial banks are permitted to borrow to the extent of 125% of their capital funds in the call/notice money market, however their fortnightly average borrowing outstanding should not exceed more than 100% of their capital funds (Tier I and Tier II capital). At the same time SCBs can lend to the extent of 50% of their capital funds on any day, during a fortnight but average fortnightly outstanding lending should not exceed 25 per cent of their capital funds.

Co-operative Banks are permitted to borrow upto 2% of their aggregate deposits as end of March of the previous financial year in the call/notice money market.

Primary Dealers can borrow on average in a reporting fortnight up to 225% of the total net owned funds (NOF) as at end-March of the previous financial year and lend on average in a reporting fortnight up to 25% of their NOF.

The trades are conducted both on telephone as well as on the NDS Call system, which is an electronic screen based system set up by the RBI for negotiating money market deals between entities permitted to operate in the money market. The settlement of money market deals is by electronic funds transfer on the Real Time Gross Settlement (RTGS) system operated by the RBI. The repayment of the borrowed money also takes place through the RTGS system on the due date of repayment.

Arbitrage b/w CBLO and repo market  

There can be arbitrage opportunity for market participants who have access of both the markets. If repo rate is less than CBLO rate than banks or PDs can borrow in repo market and lend that money in CBLO market for almost risk free return. 

If CBLO rate is less than reverse repo rate than banks can borrow in CBLO market and park that money with RBI at reverse repo rate for risk free return.

So for no arbitrage CBLO rate should be in between of repo and reverse repo rate. Now reverse repo rate is always 100 basis point less than repo rate.