Interest 'corridor' planned for lending, deposit rates

Bangladesh Bank plans to introduce a much-hyped 'interest rate corridor (IRC)' following India's model to ensure coordinated lending and deposit rates under a financial-reform package.

This is believed to be part of the central bank's monetary-policy-modernisation framework suiting an IMF condition to be executed from the next fiscal year prior to getting second tranche of its US$ 4.7-billion loan needed to stabilise the country's forex-market volatility.

As part of the move, the central bank already shared the plan in detail with the treasury officials of primary dealers in a meeting held Wednesday at the BB headquarters and sought their opinions regarding the deposit and lending window for banks-a new strategy never seen before in this country.

In fact, the interest-rate corridor is minimum and maximum interest-rate ceilings.

Once the corridor is applied, there is a guarantee that the short-term interest rates will not go above or below a certain limit.

Interest rate can fluctuate in short term that can have a detrimental effect on investors and depositors. So, the corridor plays an important role in keeping a balance.

Officials at the BB have said the central bank plans to implement the window of rates from July next to meet a key IMF recommendation before getting the second installment of the loan.

According to them, they analysed the interest-rate corridor of the Reserve Bank of India (RBI), which they found suitable to apply for the US$ 400-billion-plus economy.

According to the RBI mechanism, interest-rate corridor refers to the window between marginal standing facility (MSF) like the special repo and standing deposit facility (SDF) like the reverse repo wherein SDF rate acts as a floor and the MSF rate as the ceiling.

Ideally, rates on the overnight interbank call-money market, where lending and borrowing are insecure, should move within this corridor for checks and balances in trading in money.

Currently, the SDF rate is 6.25 per cent while the MSF is 6.75 per cent and the repo rate 6.50 per cent. And the difference among the rates is 0.50 basis points in India.

But the situation is quite different in Bangladesh, as there is a much wider difference within the rates (reverse repo 4.50 per cent, repo 6.0 per cent and special repo 9.0 per cent).

Seeking anonymity, a BB official said an IMF condition was to modernise the monetary-policy framework and IRC is an element of the modernisation move.

Under the move, the official said, the BB plans to use the RBI model in formulating IRC here with a wider range from the upcoming fiscal. It will be clearly mentioned in the next Monetary Policy Statement (MPS) due in the third week of next June.

"Yes, the difference among the rates is quite high of 4.5 percentage points. We'll probably narrow down the difference a bit after discussion with the stakeholders, but it will be wider than that of India," the official says about trimming the margins.

The official also informed that the central bank would do adjustment after analysing the market on a regular basis.

A senior executive of a private commercial bank, who attended the meeting with the BB, says there is no consistency between the rates of inflation and the repo, which could create a problem in the functioning of the IRC.

"Look at the inflation, which is over 9.0 per cent, while the repo rate is 6.0 per cent. A balancing is needed in this area to make the windows of deposit and lending effective," he suggests.

He notes that the primary dealers, in most cases, do not get full funds as per their liquidity requirements under the repo. To meet the credit demand, they have to go for special repo, which is very much costly as its rate is 9.0 per cent.

"This needs to be lowered further so that the banks use the lending window of BB efficiently," the senior banker says.

Managing director and chief executive officer of Mutual Trust Bank (MTB) Limited Syed Mahbubur Rahman thinks the BB can use the mechanism of India's IRC and it should be relevant to the country's money market.

"We also need to see whether the treasury rate is really market-driven, which is very important to this matter," he says about what in the end comes out of the donor-driven move on upgrading the money market.

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