Why is there an inverse relationship between call rates and other short term money market instruments?
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inverse relationship between call rates and other short-term money market instruments. Here is the reason for this inverse relationship.
We know that call rates are the interest rates that are charged on call money. Call money is one of the many instruments that prevail in the money market for raising short-term finance. Now, whenever call rates rise-up, it means that an organisation needs to pay more amount of interest if it resort to call money to meet its short-term financial needs. This means that call money has become a relatively expensive as compared to the other money market instruments. Hence, it is quite rational that organisations will now resort to other instruments, which are now cheaper (as the rise in call rates made call money expensive).
On the other hand, if there is a fall in the call rates, then it means that call money is now cheaper, since the interest payable on call money is lower. This makes resorting to call money to meet short-term finance requirements attractive in comparison to other instruments such as commercial papers and certificate of deposits. Hence, in such a scenario, the demand for call money rises-up.
These opposite movements between call rates and demand for other short-term money market instruments confirm the presence of inverse relationship between the two
We know that call rates are the interest rates that are charged on call money. Call money is one of the many instruments that prevail in the money market for raising short-term finance. Now, whenever call rates rise-up, it means that an organisation needs to pay more amount of interest if it resort to call money to meet its short-term financial needs. This means that call money has become a relatively expensive as compared to the other money market instruments. Hence, it is quite rational that organisations will now resort to other instruments, which are now cheaper (as the rise in call rates made call money expensive).
On the other hand, if there is a fall in the call rates, then it means that call money is now cheaper, since the interest payable on call money is lower. This makes resorting to call money to meet short-term finance requirements attractive in comparison to other instruments such as commercial papers and certificate of deposits. Hence, in such a scenario, the demand for call money rises-up.
These opposite movements between call rates and demand for other short-term money market instruments confirm the presence of inverse relationship between the two
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