Enhancement of cash flow along with institutional investors’ continuous and active participation is a must to bring stability in the country’s share market, said Akter Hossain Sannamat, a market analyst.

While talking to daily sun the managing director of Union Capital recommended reducing cash reserve requirement (CRR) and statutory liquidity requirement (SLR) for increasing fund flow to the market.

“Bangladesh Bank can reduce CRR and SLR to increase fund flow into market,” he said, although some experts fear that it will create more inflation.

Akter H. Sannamat suggested 0.50 per cent reduction in CRR taking it as a test case.

If it casts negative impact on the economy, CRR could be enhanced again through reverse REPO, he opined.

The analyst argued that cash flow will not worsen the inflation situation if it is cost-push.

The cost-push inflation is experienced when there are substantial increases in the costs of important goods or services where no suitable alternative is available.

He said Bangladesh is facing cost-push inflation, so will not be hit by cash flow in the market.

“The inflation will be worsened if it is demand-pull, but ours is the cost-push inflation,” Akter H Sannamat explained.

The demand pull inflation means substantial increases in the prices of goods and services resulting from high demand, but insufficient supplies, stimulated by easy credit and higher purchase offers.

In general, more inflation is caused by demand-pull factors than by cost-push ones.

Sannamat urged the government to cut import duty and supplementary tax to ease cost push inflation.

If CRR and SLR are reduced, it will swell funds flow in the money market, and then money market will be soft, he said.

“The soft money market will cut lending rate and eventually decrease production cost.”

He clarified that when production costs decline, inflation will come down.

Akter Sannamat also said decrease of CRR and SLR will not increase money supply excessively, as the banks and financial institutions are still in short of fund.

But it would help to meet the demand of banks and non-banking financial institutions of reducing CRR and SLR conditions.

The country’s twin bourses were bullish in 2010, which was said because of aggressive investment of the commercial banks.

The turnover value also mounted to Tk 32.49 billion at that time.

Although a commercial bank can invest 10 per cent of its liabilities in the stock market according to BB rules, most of the banks, in 2010, exceeded this limit.

Even the investments of some banks reached up to 30 per cents of their liabilities.

However, the current investment of the commercial banks, on an average, is 2.25 percent.

In the recent weeks, the market experiencing downtrends reportedly due to fund shortage.

The Daily Sun/Bangladesh/ 5th Aug 2012