BB to curb liquidity flow, limit repo to 7-day tenure from May

Bangladesh Bank has decided to reduce liquidity support to commercial banks from May this year. 

From 3 May, banks facing liquidity shortages will be able to access only seven-day repo facilities from the central bank. The move is aimed at reducing the flow of liquidity into the market compared to previous levels.

Currently, banks can receive liquidity support from the central bank through both seven-day and 14-day repo facilities. Earlier, 28-day repo support was also available, but that was discontinued in April last year.

When commercial banks face liquidity shortages, they borrow from the central bank through a facility known as repo. 

Yesterday, Bangladesh Bank published the Guidelines for Open Market Operations, which state that from 3 May this year only the seven-day repo facility will remain in effect. The new guidelines also stipulate a 5% haircut on the market value of securities.

When banks face short-term liquidity shortages, they borrow from the central bank under repo, or repurchase agreements. The interest rate is determined through these agreements. Through the buying and selling of government securities under this system, Bangladesh Bank manages the money supply in the market.

Experts say limiting repo to only seven days will reduce banks' reliance on borrowing from the central bank. This will encourage them to manage liquidity more independently and increase borrowing and lending in the interbank market, making it more vibrant. They also note that any liquidity support from the central bank effectively creates additional money, which could further fuel inflation.

Md Ezazul Islam, director general of the Bangladesh Institute of Bank Management (BIBM), said, "Introducing only the seven-day repo will be good for the market. Because any borrowing from the central bank results in money creation, which can further increase inflation."

He added, "Previously, commercial banks could borrow through two instruments; now they will have access to only one. With fewer opportunities, banks will turn more to the call money market."

A senior Bangladesh Bank official told The Business Standard that in the current fiscal year, the central bank has purchased around $5.5 billion from commercial banks through auctions. As a result, more than Tk70,000 crore has entered the market, leaving banks with sufficient liquidity. Therefore, discontinuing the 14-day repo is unlikely to create major difficulties.

A deputy managing director of a private bank told TBS that the opportunity to access central bank funds has now decreased. "Previously, funds obtained through repo could meet a bank's liquidity needs and allow it to lend in the interbank market. With only a seven-day repo, the scope for interbank lending will shrink. Banks will focus only on meeting their own needs."

Another senior central bank official told bdnews24.com that banks should borrow from the call money market when needed, which would strengthen the interbank market. "But our banks are not practising that," he said.

"Instead of borrowing from the interbank market, banks are borrowing more from the central bank. They should come to Bangladesh Bank only when they cannot obtain funds from anywhere else."

A senior official of Bangladesh Bank also said that many banks have been borrowing at lower rates through 14- and 28-day repo facilities and investing in higher-yield government treasury bills and bonds to earn extra income. "We want to close this opportunity as well. For these reasons, we are discontinuing the 14- and 28-day repo facilities and keeping only the seven-day repo. As a first step, the 28-day repo was discontinued earlier; now the 14-day repo has also been withdrawn. This move is intended to make open market operations more effective in line with the interest rate corridor framework."