The Bangladesh Bank (BB) has raised its interest rate slightly on reverse repurchase agreement (repo) auction for the banks to ensure stability of the inter-bank money market.
The central bank took the move to withdraw excess liquidity from the country's banking system through increasing the interest rate on reverse repo auction, official sources said.
The BB has already re-fixed its interest rate on reverse repo for 1-day tenor to 5.50 per cent from 5.00 per cent to encourage the banks for participating in such auction.
According to the BB statistics, excess liquidity of the all scheduled banks stood lower at Tk 103.84 billion at the end of July, 2005 compared to Tk.109.42 billion at the end of June, 2005.
Sources, however, said the BB's latest initiatives are yet to bring positive impact on the market due to increase in the demand of liquidity ahead of the Eid-ul-Fitr festival.
The participation of such auction has gradually declined despite increase in the interest rate on the overnight borrowing, sources in the market said.
The central bank withdrew fresh fund from the market amounting to Tk 250 million at 5.50 per cent Wednesday while Tk 300 million last Tuesday through the reverse repo auctions.
"The demand of fresh liquidity has already been increased in the banking sector ahead of the Eid festival," a fund manager of a commercial bank told the FE Wednesday.
He also said why the banks should lend fresh fund to the central bank at 5.50 per cent while most of the deals were settled between 6.00 per cent and 6.50 per cent in the inter-bank money market.
The overnight borrowings usually rise before the Eid festival to meet the extra demand of the bank customers while the central bank may intervene using its tools like repo to keep the market stable.
Under the existing provisions, the central bank conducts repo auction every working days including the days of treasury bills and government bond auctions to ensure stability of the market.