Bangladesh Bank wants a proper investigation into the current volatility of stock market and it has decided, in principle, not to pump any money into the share market, BB sources said yesterday.

Repo auctions to ensure adequate supply of liquidity in the banking sector will, however, be continued, sources added.

On last Monday and Tuesday, the BB disbursed a total of Tk 4 billion in favour of Investment Corporation of Bangladesh (ICB) in two equal installments.

The BB acts as the money market controller as it mainly reins in the inflation through proper monetary policy while SEC regulates the capital market, but the central bank is being held responsible for the volatility in the capital market, which is irrational, the central bank said in a statement yesterday.

A stable and comprehensive stock market plays a very important role for a long-term financing source. For building up confidence among the investors and ensuring a stable share market, the BB took a number of supportive measures much earlier, it said.

The BB had to control the liquidity flow to rein in inflation for ensuring stability in the banking sector, and serve the depositors’ interests through monitoring, it mentioned adding that it recently took a growth supporting monetary policy.

The new policy ensures that low interest loans are not used as consumer loans or go outside the money market. In view of it, the BB specified some sectors like agriculture and SMEs for increased loan flow.

Bangladesh Bank Governor, Dr Atiur Rahman, at a meeting with the bankers in late 2009, warned that some banks were investing their excess liquidity in the capital market. “It won’t be an offence if they do it strictly following BB and SEC’s compliance guidelines,” he added.

The capital market, otherwise, might witness a very volatile situation and banks’ main capital might also be in danger, he warned adding: “This would affect both the depositors and the equity.”

In October 2009, BB issued a circular in line with Bank Company Act, 1991 instructing the scheduled banks to open separate subsidiary company by January 2010 for merchant banking, which is yet to be fully implemented.

Earlier, in July of the same year, the central bank issued another circular asking them not to exceed their share market investment limit, 10 percent of their total liabilities, according to the act.

Despite their failure to meet the January 2010 deadline of separating merchant banking from the mainstream banking activities, the BB did not take any actions against them. Instead, it kept on reminding them of share buying limit.

News: Daily Sun/Bangladesh/21 Jan 2011