To recover from the impacts of the coronavirus pandemic, the Bangladesh Bank wants to continue the policy of maintaining the excess liquidity in the money market so that there is no shortage of cash. This is the reason why there was no reverse repo auction held in the last two quarters (July-September and October-December) of 2020.
On the 9th of March, the central bank revealed the information in the quarterly report on the currency and its exchange.
The reverse repo is the withdrawal of surplus money from commercial banks through treasury bills and bonds to control the money supply. On the other hand, a repo is when a bank is going through a financial crisis and takes a loan from the central bank by depositing treasury bills.
Habibur Rahman, the executive director of Bangladesh Bank, said to the Business Standard when asked about the maintenance of liquidity in the currency market, that Bangladesh Bank is still pursuing a policy of maintaining liquidity since July of 2020 due to the shock of the global pandemic.
Even though the banks have excess liquidity, the policy has been continued through the first quarter of 2021 (January-March). He stated that no change in the policy is to be expected until the private sector’s credit growth reaches 10 per cent. The credit growth in the private sector has been on the decline since September 2020, falling to 8.32 per cent in January 2021. The target for the second half of the current financial year is set at 11.5 per cent.
On top of this the government is taking fewer loans than usual as it has to spend less. This also contributes to the excess liquidity in the banking system. Besides that, Bangladesh Bank is implementing a package of incentives to tackle the coronavirus pandemic as well as the exchange rate stable by purchasing dollars from the market.
Because of all these factors, there is a good amount of excess liquidity in the banking system, which exceeded Tk 2 lakh crore at the end of December of 2020.
However, Habibur Rahman thinks that excess liquidity will not provoke inflation.
He said, “Considering the international context, inflation would not come suddenly unless there was some kind of natural calamity in the country.”
Meanwhile, banks do not have to borrow money from other banks for a short period of time due to excess liquidity. As a result, call money (interbank loan) interest rates fell to 1.69 per cent at the end of December.