11 days ago

Liquidity hunger heats up money market

Vendors in the city’s Gulistan area are selling fresh banknotes on Tuesday, with demand rising ahead of Eid-ul-Fitr. — FE Photo by Shafiqul Alam
Vendors in the city’s Gulistan area are selling fresh banknotes on Tuesday, with demand rising ahead of Eid-ul-Fitr. — FE Photo by Shafiqul Alam

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Money market gathers heat as the demand for cash in the liquidity-scant banking sector surges ahead of Eid festival, officials and bankers said.

To meet the growing demand for credits under the persisting contractionary monetary regime, many of the commercial banks having liquidity tightness have intensified their presence in key windows like interbank borrowing and liquidity supports from the Bangladesh Bank (BB), the country's central bank, according to them.

And the result is obvious: the call-money rate starts rising again while the volume of cash support by the BB to the credit-hungry banks keeps mounting and thereby heats up the money market.

According to data of the central bank, the call-money rate was 8.46 per cent even on March 13, 2024. Since then, the interbank borrowing has been on the rise, to reach around 9.0 per cent on April 01, 2024, indicating the surge in credit demand on the money market.

On the other hand, the commercial banks altogether received liquidity supports amounting to Tk 3.11 trillion in 20 trading days of the just-past month. But in the last 10 trading days, the banks got cash supports to the tune of Tk 1.72 trillion while the figure was Tk 1.39 trillion in the first 10 trading days.

Seeking anonymity, a BB official says the demand for cash normally goes up ahead of Eid as people from all segments of society need money to spend on festival purposes. "But there is still liquidity tightness on the market because of the central bank's monetary policy to contain inflation."

As a matter of fact, the pressure on the money market continues mounting, which is only expected and normal. The banks having liquidity appetite preliminarily chose the option of interbank borrowing.

"If the banks do not get their requisite funds from the window, they come to the central bank to meet their liquidity obligations through using liquidity-receiving windows like repo, ASLF (assured liquidity support facility), AR (assured repo), IBLF (Islami Bank Liquidity Facility), MLS (Mudaraba Liquidity Support) and SLF (standing lending facility)," the central banker says to explain the phenomenon.

Citing an example, he says the cash-strapped commercial banks received over Tk 288 billion on March 27 last-the highest single-day credit feeding in the banking history.

Responding to a query, the BB official said the central bank opens many windows for banks to get liquidity assistance from the banking regulator against their treasury receipts. "And these will help keep the call-money rate within 9.50 per cent, which is the upper ceiling of the IRC (Interest Rate Corridor)."

Managing director and chief executive officer of Dhaka Bank Emranul Huq says growing liquidity demand starts heating up the money market now as the money supply, particularly from deposits, is getting squeezed in recent days even through offering higher rates.

"Simultaneously," he says, "a good chunk of the funds remains stuck up because of NPL (non-performing loan) while government bank borrowing to meet its budget-financing shortfall surges, which puts the liquidity situation under serious pressure."

And the growing demand for credits ahead of Eid mounts the pressure further. "That's why banks deal in interbank borrowing and BB's liquidity-supporting instruments keeps rising. I think it will go up further in the coming few days."

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