14-day repo facility to end in Sep, treasury yields may ease with new liquidity tool

Infograph: TBS

The Bangladesh Bank is set to discontinue its 14-day repo facility from September, a move expected to reshape liquidity management in the banking sector and influence treasury bill and bond yields.

To soften the transition, the central bank will, for the first time, introduce the intra-day liquidity facility – long requested by banks struggling with timing mismatches in fund settlements.

This shift forms part of broader reforms under Bangladesh's loan programme with the International Monetary Fund, which calls for phasing out longer-tenure repo operations.

Confirming the upcoming changes, Arif Hossain Khan, executive director and spokesperson of the Bangladesh Bank, told The Business Standard, "Our updated Core Banking System (CBS) will go live on 1 August. If it runs smoothly, we will discontinue the 14-day repo and introduce intra-day liquidity support from September."

A senior policymaker said the central bank would observe CBS operations throughout August before finalising the transition. "If the CBS functions as intended, we'll move forward with the repo closure and the intra-day liquidity rollout. We want to ensure that banks do not face any disruption in liquidity management."

Repos are short-term loans in which banks sell government securities to the central bank with an agreement to repurchase them at a slightly higher price. Before April, the Bangladesh Bank offered repos for 7, 14, and 28 days.

However, the central bank scrapped the 28-day repo facility in April. Although the 14-day repo was initially scheduled for closure in July, the timeline was extended due to mounting liquidity pressure in the banking system. 

Therefore, from September, only the 7-day repo will remain active.

Meanwhile, yields in the treasury market surged following the initial repo phase-out plan. On 16 June, the interest rate on 91-day treasury bills reached an all-time high of 12.10%, while 182-day and 367-day bills yielded 12.11% and 12.24%, respectively.

However, with the central bank now delaying the exit and introducing the intra-day liquidity tool, bankers anticipate improved stability.

Senior treasury executives at several commercial banks expressed confidence that the combined measures will calm the market and gradually reduce treasury yields. They noted that the announcement had already led to some easing in rates.

Why intra-day matters

Bankers have long demanded a system like intra-day liquidity facility, citing persistent difficulties in managing cash flow under the current repo mechanism.

According to several deputy managing directors, a key issue is the mismatch in fund debit and credit timing. When banks repay repo funds, the amount is deducted early in the day, while fresh repo borrowings are credited only in the afternoon.

"This gap creates strain in managing the cash reserve ratio," said a senior banker. "Intra-day liquidity facility will solve this timing mismatch and provide greater flexibility."

Treasury yields showing signs of easing

Market reaction to the announcement suggests improving conditions. On Sunday, the central bank had planned to raise Tk8,000 crore through treasury bill auctions. However, it ended up raising Tk11,794 crore. The 91-day bill rate edged down to 12.09 %, while 182-day and 367-day yields fell to 12 % and 12.03 %, respectively.

Officials noted that repo facilities are essential for managing the statutory Cash Reserve Ratio, as banks rely on tenors of varying lengths to optimise their reserve positions. The absence of the 14-day repo and delays in implementing intra-day liquidity facilities could have worsened reserve management and increased liquidity stress.

Looking ahead, bankers expect further softening of interest rates with the start of the new fiscal year in July. Government borrowing typically slows in the first quarter, easing pressure on liquidity.

Bangladesh Bank data show that, as of 15 June, the government had already borrowed Tk99,591 crore from the banking system in the current fiscal year, surpassing the full-year target of Tk99,000 crore.

Gross borrowing from scheduled banks stood at Tk1.22 lakh crore, while repayments to the central bank totalled Tk22,769 crore. This places net government borrowing at Tk99,591 crore.