Excess liquidity cuts call money rate in 2015

The inter-bank call money rate has fallen sharply in 2015, as liquidity soared in the banks, the US-based Citibank NA Bangladesh said in its annual market update.
The weighted average call money rate, which was at 8.57 per cent in January 2015, plunged to 3.69 per cent by the end of the last calendar year, according to the update.
The private sector credit growth remained stable at 11-13 per cent range throughout most parts of the year, before picking up in October onwards and reaching 13.72 per cent in November.
"With low demand for domestic credit as many corporates resorted to foreign borrowing due to lower interest rates, the inter-bank money market volumes remained low, and interest rate dipped, as liquidity soared in banks," the foreign commercial bank (FCB) observed.
Throughout the year, the banks deployed the excess liquidity with the Bangladesh Bank (BB) through reverse repo operations, it added.
Meanwhile, the overall excess liquidity with the commercial banks stood at around Tk 1.20 trillion as of December 10. But major portion of the funds has been invested in the risk-free government securities, a BB senior official told the FE on Monday.
He also said the excess reserve, generally known as excess over daily minimum cash reserve requirement (CRR) with the central bank, stood at around Tk 37 billion.
Talking to the FE, a senior official of a leading private commercial bank (PCB) said more than 20 banks are still heavily burdened with excess liquidity because of lower credit demand from the businesses, engaged in both trade and industrial operations.
"The banks are compelled to invest their excess liquidity in the government securities and 30-day BB bills to minimise cost of funds," the PCB official noted.
However, from mid-October, the BB squeezed acceptance of reverse repo bids, and suspended it altogether from November 16.
The central bank changed its mode of absorbing excess liquidity by stepping up 30-day BB bills bid acceptance, which however, yields a lower rate compared to reverse-repo rate of 5.25 per cent, putting more pressure on the call money rate, according to the update.
"The BB's move is aimed at leading banks towards investing more in the productive sectors by slashing interest rate on lending," the Citibank explained.
With falling call money rates and subdued credit demand, the commercial banks have flocked towards the government securities to deploy excess funds, which drastically dragged down the securities' yields across all tenors, it added.
Slower-than-expected implementation rate of Annual Development Programme (ADP) projects, less subsidy requirements driven by low global oil prices, and higher sales of savings certificates meant lower borrowing requirement by the government denting the yields further, according to the FCB.
After the late upsurge of the US dollar against the Bangladesh Taka (BDT) during the end of 2014, USD/BDT rate fell to 77.80 by the end of January, a level that prevailed for almost nine months.
During the beginning of 2015, import orders remained on the lower side with export and remittance growth being modest.
The BB bought US$ 2.16 billion from the inter-bank foreign exchange (FX) market during the first six months of FY 16, compared to $ 3.76 billion in FY 15.
After a long period of stability, the US currency marked sharp gains against BDT from late October, and it jumped from 77.80 to 78.95 by the end of November, according to the update.
"This was primarily driven by sluggish export and remittance growth in the preceding months, coupled with large infrastructure-related payments and foreign loan repayments," it explained. The BDT closed at 78.50 to each US$ by the end of the year.
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