The call money rate has been on the slide since July
The weighted average call money rate, which is the rate at which banks lend overnight money to each other, dropped to 1.52 per cent on January 20 this year, indicating the market is flush with liquidity with hardly any demand for credit.
The rate dropped by 3.52 percentage points in the last one year, as per the latest data from the central bank.
On January 20, the highest and lowest interest rates stayed between 5.25 per cent and 1 per cent.
The call money rate has been dropping continuously since July, when the central bank announced a vastly expansionary monetary policy for fiscal 2020-21 to avert a hard landing for the economy from the pandemic shock.
“The expansionary monetary policy led to excess liquidity in the banking sector,” said a high official of the Bangladesh Bank requesting anonymity as he is not authorised to speak with media.
The rate has remained below 2 per cent for the last two months owing to the expansionary monetary policy of the central bank and poor credit demand, he said.
Besides, the BB is also injecting funds to the financial sector by way of implementing the stimulus packages.
As a result, at the end of November, the excess liquidity in the banking sector stood at about Tk 1.95 lakh crore, which is the biggest in at least recent years.
Due to the huge cash flow in the market, the lenders’ average daily borrowing from the call money market has also dropped.
Between January 10 and January 20, the banks’ daily borrowings from the call money market ranged between Tk 3,276.99 crore and Tk 6,314.28 crore.
However, the banks’ daily borrowings from the call money market ranged between Tk 7,672.76 crore and Tk 9,023.65 crore between July 9 and July 20 last year.
The call money rate dropped mainly due to the slow credit demand amid the ongoing pandemic and the increasing trend of surplus liquidity in the banking sector, said Syed Mahbubur Rahman, managing director and chief executive officer of Mutual Trust Bank.
The demand for credit by businesses had remained dismal after the coronavirus outbreak in March, which is reflecting in the private sector credit growth numbers.
In November, private sector credit growth stood at 8.21 per cent, which is way lower than the BB’s target of 14.8 per cent for this fiscal year.
The private sector credit growth has been hovering around 8 and 9 per cent-mark for several months now.
Imports fell sharply, especially of lifestyle products amid the pandemic, which has helped to increase the liquidity in the banking sector, said Emranul Haq, managing director of Dhaka Bank.
Between July and November, import payments amounting to $20.2 billion were made, down about 8.84 per cent from a year earlier, according to data from the BB.
The surge in remittance inflows is also helping to boost surplus liquidity in the sector, he added.
Remittance inflow to Bangladesh witnessed a massive growth of 37.6 per cent in the second half of 2020 from a year earlier.
“The surge in surplus liquidity is not a good sign for the economy,” Haq said, adding that the central bank should take an immediate initiative in this regard.