Call money rate hits two-year high amid rising liquidity crunch

The interbank call money rate has reached a two-year high, exceeding 5%, amid a rising liquidity crisis in banks.

The weighted average rate in the call money market, where banks borrow from each other on an overnight basis, stood at 5.02% on Monday, according to data from the Bangladesh bank.

The previous peak was recorded on 16 June 2020 when the rate stood at 5.03%.

Industry insiders say if money supply does not increase, the cash shortage may exacerbate ahead of Eid-ul-Azha.

The rise in repurchase agreement (repo) rate has also contributed to a rise in the call money rate, they add.

The central bank raised the repo rate to 5% from 4.75% to control inflation on 29 May. 

In the span of a day, the overnight rate in the call money market rose to 4.95% from 4.73%. On 31 May, the rate reached 5.01%. And, the uptrend has continued in June too as the rate hovered between 4.97% and 5.01% in eight working days of the current month before reaching the record 5.02% on Monday, said data from the central bank.

An analysis of the monthly data of the call money rate shows on 31 May, the rate rose to 5.01%. in contrast to 4.98% in April, 4.6% in March, 4.63% in February and 2.72% in January. Earlier, in 2021, the call money rate peaked at 4.49% on 18 November.

Arequl Arefeen, chief of the treasury department at Bank Asia, told The Business Standard that banks continue to purchase dollars from the central bank, leading to a liquidity crisis in the banking channel.

Heavy purchase of greenbacks for settling escalating import payments, higher government's bank borrowing to meet budget deficit and lower deposits with banks are three main reasons behind the growing liquidity crisis in the banking system, according to treasury heads of several banks. 

Brac Bank Deputy Managing Director Md Shaheen Iqbal said some banks are facing a liquidity crisis. Currently, credit growth is higher than that of deposits, leading banks to more competition with one another to collect deposits. 

Interbank dollar rate rises to Tk92.5 

The interbank exchange rate of dollars increased to Tk92.5 on Monday from Tk92 a day before.

Bangladesh Bank spokesman Md Serajul Islam told TBS that the dollar rate fluctuates based on the demand for and the supply of greenbacks in the market. 

The central bank on Monday sold $103 million at Tk92.5 per dollar, he noted

The treasury heads of several banks said some banks opened letters of credit at Tk93.95 on Monday and some at Tk93.50, while they collected remittances at Tk93.

A Bangladesh Bank official concerned said the central bank is now selling $100 million per day on average for government import payments. 

But no banks are getting dollars to open an LC at the interbank rate of Tk92.50 per dollar, he added.

In the meantime, the Association of Bankers, Bangladesh and the Bangladesh Foreign Exchange Dealers' Association on Sunday met Bangladesh Bank Governor Fazle Kabir and called for increasing dollar supply to ease the foreign currency crisis caused by the soaring trade deficit and declining inflows of remittances.

"In the meeting, the situation of dollar supply along with several other issues has been discussed. Bankers requested us to increase dollar supply and we also talked about how we can receive due payments from foreign entities fast," Serajul Islam told TBS.

Amid the ongoing dollar crisis, remittance inflows and exports are on the lower side, while import payments continue to go up because of soaring product prices globally.

The country received $19.19 billion in remittances in the 11 months of the current fiscal year (July-May), 15.94% lower than the corresponding period of the previous year.

The foreign exchange reserves stood at $41.7 billion last week, down from $48 billion in August last year. The central bank has so far sold about $7 billion worth dollars to banks in the ongoing fiscal year.

The country's trade deficit hit a historic high of $27.56 billion in the first 10 months of the fiscal year, with high import expenditure and low export earnings, according to the Bangladesh Bank.

Besides, private sector credit growth saw a big jump in April, marking a three-year high, mostly backed by import financing and rising credit demand amid business expansion in the post-pandemic recovery period.  

The credit growth rose to 12.48% year-on-year in April from 11.29% in the previous month. However, the growth rate is still far lower from the monetary ceiling of 14.8% set for the current fiscal year by the Bangladesh Bank.