Dhaka, Bangladesh (BBN) – Call money rate remained unchanged during early trading on Tuesday following implementation of the new cash reserve requirement (CRR) rules for the commercial banks, treasury officials said.
The call rate was almost stable at 6.0 per cent, they added.
Excess liquidity amounting to BDT 32.14 billion will be deposited to the Bangladesh Bank (BB) by the commercial banks by the end of Tuesday to maintain the new CRR rules, they added.
“Such measure does not work instantly in developing countries like Bangladesh mainly due to the weak monetary transmission mechanism,” an expert said, adding that it will take times to bring an impact on the market as well as the economy.
On Monday, the central bank raised the CRR by fifty basis points to 6.50 per cent for the commercial banks to reduce inflationary pressure on the economy by way of withdrawing excess money from the market.
Under the new rules, the commercial banks will have to maintain 6.50 percent CRR with the central bank from their total demand and time liabilities on a biweekly basis.
The banks are allowed to maintain the reserve at 6.00 per cent instead of the existing 5.50 per cent on daily basis, but the biweekly average has to be 6.50 per cent in the end.
The overall excess liquidity with the commercial banks stood at Tk 1022.23 billion, as on May 1 last, due mainly to lower credit demand from both public and private sectors, according to the central bank statistics.
Most of the excess liquidity had already been invested in the government-approved securities as a risk-free investment for banks. They made it clear that excess liquidity does not necessarily mean idle money for the banks.
"We raised the CRR for a number of reasons. Recently the Ministry of Finance decided to temporarily suspend Treasury auctions, and as a result, banks rushed to the central bank to park their excess liquidity through our interest-bearing reverse-repo facility,” said Hassan Zaman, chief economist of the BB.
This has sharply increased the cost of this facility to the central bank and, by extension, to the taxpayers since this implies that the BB can contribute less to government revenue, the chief economist added.
“By raising the CRR we save a portion of these costs. Also private- sector credit-growth figures show that there is sufficient space for banks to lend to their customers if they wish to. So raising the CRR will not affect investment,” Dr. Zaman explained.
“Moreover, this move also helps us in keeping to our reserve money targets which will help in bringing non-food inflation down further. So, overall, there are lots of advantages to this as entrepreneurs won't suffer from a fund shortage, it has inflation benefits and lowers the interest burden on the public,” he noted.
Salehuddin Ahmed, former BB governor, said there was no valid reason for the enhancement of CRR.
But he, however, said it would help contain the rising trend in the inflation and discourage speculative investment to some extent.
“The private sector credit growth may hamper in the near future due to increase in the CRR,” a senior official of a leading private commercial bank told BBN in Dhaka. “The cost of doing business of the commercial banks will increase.”
The country's businessmen think the BB's latest move may affect them more or less, saying that the borrowing from the banking system may be squeezed in the near future due to increase in the CRR.
But the central bank ruled out such observations, saying that it will not not squeeze the credit flow to the private sector because excess liquidity is now available in the country’s banking system.
The central bank expects the inflationary pressures on the economy to ease in the coming months following the latest policy intervention.
BBN/SSR/AD-24June14-1:29 pm (BST)
