The central bank moves to mop up excess liquidity from the market as private credit squeeze for investment stagnation as against increased money supply bloated banking system.
Economists also apprehend that cheap funds from government stimulus for corona crunch relief may be landing in unproductive sectors to create a glut in money supply.
Officials said Thursday the auction of Bangladesh Bank (BB) Bills is going to resume Monday aiming to absorb idle money from the market.
"We've decided to hold auctions of our three-type BB Bills as monetary instruments to mop up surplus liquidity from the banking system," a BB senior official told the FE while replying to a query.
He also said an auction calendar had already been sent to all the scheduled banks and non-banking financial institutions (NBFIs) for taking necessary preparation in this connection.
The latest BB move comes against the backdrop of banks' surplus liquidity hitting an all-time high at Tk 2,315 billion as of June 30 this calendar year, fuelled by lower private credit growth in a sign that the investment situation has cooled.
Actually, the amount of excess liquidity grew by nearly 66 per cent to Tk 2,315 billion in June 2021 from Tk 1,395 billion a year before, according to the central bank's latest statistics. It was Tk 856 billion in June 2019.
BB officials, however, said the central bank has made the latest decisions on resuming such open-market operation after more than three years to ensure proper liquidity management in the banking system.
"It will help banks and NBFIs invest their excess liquidity in the short-term BB bills through participating in the auctions," a BB senior official told the FE.
The banks may use the BB bills to maintain their SLR (statutory liquidity ratio) with the central bank, he said explaining the management modality for the money market.
Currently, three BB bills are being used through auctions to adjust the monetary programmes of the central bank. The bills have 07-day, 14-day and 30-day maturity periods.
"Mopping up excess liquidity from the market will depend on the yields of the bills," Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh, told the FE while explaining the possible impact on the market.
Mr Rahman, also managing director (MD) and chief executive officer (CEO) of Mutual Trust Bank Limited, said the central bank could also look into resuming the reverse-repo operation to address the current liquidity situation.
"It's a positive initiative of the central bank for mopping up the surplus liquidity from the country's banking system," Khondaker Golam Moazzem, research director of the Centre for Policy Dialogue (CPD), told the FE in his initial reaction.
He also suggests the BB should take further necessary measures in this connection.
"The central bank should strengthen its monitoring and supervision to avert possible diversion of low-cost funds under the stimulus packages into unproductive sectors," Dr Moazzem said in reply to a query.
The central bank has already decided to probe utilization of the loans under mainly two major stimulus packages worth Tk 600 billion to ensure proper use of the subsidised credits by the end of this month.
Prime Minister Sheikh Hasina has so far announced 28 stimulus packages worth Tk 1.35 trillion to offset the impacts of the pandemic on various sectors.
The packages, which account for 4.9 per cent of the country's gross domestic product (GDP), are now being executed under the supervision of the central bank and the finance ministry for mitigating the adverse impacts of the pandemic coronavirus on the economy and facilitating faster economic recovery of Bangladesh.
Multitudes of people and businesses in countries across the globe continued to depend on such government aid packages as the scourge upended normal order, and life and livelihood as economic activity got shuttered under lockdowns enforced to ward off infection with the lethal viral flu.
With the virus held in check through mass vaccination and mask use, developed economies are reopening. They are also facing bubble in different sectors following huge money supply from stimulus packages and idle money in public hands.
Talking to the FE, Shah Md. Ahsan Habib, professor and director at Bangladesh Institute of Bank Management (BIBM), said such mopping up of excess liquidity from the market would help the banks and NBFIs to reduce their cost of funds.
"It will also ultimately help depositors in the form of better deposit rates in the near future," Dr Habib explained.
Another BB senior official, however, said the inflationary pressure on the economy may be stoked in the near future, if the existing level of surplus liquidity in the banking system continues.
Meanwhile, the inflation as measured by Consumer Price Index (CPI) overshot the government-set target in the just-concluded fiscal year (FY) because of higher prices of food and other essentials on the global market.
Average inflation rose to 5.56 per cent in FY 2020-21 by official account against the set rate at 5.40 per cent, according to the latest data of the Bangladesh Bureau of Statistics (BBS).
It was 5.48 per cent in FY'19.