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Question

Difficulty: MediumThe Money Market: Operations and Financial Instruments

A commercial bank facing a temporary overnight deficit in its statutory cash reserves borrows funds from another commercial bank to meet its immediate liquidity requirement. Which of the following financial instruments is used for this short-term interbank transaction?

  1. Call MoneyAnswer
  2. B
    Debentures
  3. C
    Treasury Bonds
  4. D
    Preference Shares

Answer

Call Money
Call Money (or money at call) is the specific money market instrument used by commercial banks to borrow and lend funds to one another on an overnight basis to maintain required statutory reserve ratios.

Step-by-Step Solution

1
Analyze the nature of the transaction
The requirement is for short-term, overnight interbank borrowing between commercial banks.
Short-term financial operations (maturities under one year) belong to the money market.
2
Identify the appropriate instrument
Call Money (money at call and short notice) is the principal instrument used by commercial banks for immediate overnight reserve balancing.
Debentures, Treasury Bonds, and Preference Shares are long-term capital market securities used for multi-year capital funding.

Key Concept

Money Market Instruments: Call Money
Estimated Time:1m 0s
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Topics

The Money Market: Operations and Financial Instruments

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