Bangladesh Bank (BB) yesterday played down links between stockmarket troubles and curbs on money market liquidity.

The central bank also defended its monetary policy and explained controls on the money flow as an “unavoidable necessity”.

"Some quarters incorrectly attributed the sharp price movements on the capital market to the liquidity situation of the money market, following the mid-December CRR (cash reserve ratio) increase," the central bank said in its second monetary policy statement (MPS) for the current fiscal year.

"Selling pressures that forced the price movements had little if anything to do with the money market liquidity," it said.

In its monetary policy announced yesterday, the central bank said, having a firmer grip on monetary expansion is an unavoidable necessity. All central banks in the neighbouring countries repeatedly hike both policy interest rates and CRR to curb inflationary pressure.

It said the investors offloading part of their existing stockholdings to raise cash for three upcoming initial public offering (IPO) subscriptions were apparently the proximate factors behind the selling pressure that triggered the price correction.

"In just one of the three IPOs, subscriptions worth Tk 2,640 crore were received against issue offer for Tk 610 crore. The few banks with capital market asset holdings beyond permissible limits were allowed extended periods to scale down [their exposure] to permitted levels gradually, and had no reason to cause abrupt selling pressure."

The BB said stability in the domestic markets is important to take the economy on a high growth path.

The policy statement said it would be important to have properly priced capital and real estate markets to avoid instability and jitters. "Overheated and overpriced markets typically collapse in crashes hurtful for all; the crashes are more painful the longer the price corrections are delayed."

"Soft landings, always hoped for, are seldom achieved. The price correction is required to be steadied and stabilised carefully."

It said while all possible support measures from all quarters are defensible in handling a crisis situation, the post-crisis capital market should move ahead on a self-sustaining path with realistic and sensible valuations.

The central bank also called upon the regulatory regime to provide sufficient safeguards against creating bubbles by unscrupulous market players.

The BB also expressed concern about the country's booming real estate market. It said: "Appropriate cooling off interventions have assumed urgency also in the overheated real estate markets, to avoid eventual painful crash."

The BB admitted challenges like slowdown in manpower exports and slow recovery in exports to traditional Western markets. It, however, said there are opportunities to take advantage of the newer markets in the fast-growing economies in Asia and elsewhere.

The statement also said the private sector has acted quickly in exploiting these opportunities, as was seen in the recent increases in exports to newer markets, and diversifying the export basket.

"Guiding hands of appropriate government policies will facilitate the initiatives of the private sector," it said.

The central bank attributed the slowdown in workers' remittance inflows to a decline in manpower exports and savings transfers by expatriates.

"During the uncertainties of the global financial crisis, workers abroad tended to send home their savings (alongside usual subsistence money for families at home). After restoration of the stability, the savings are being retained partly or wholly outside Bangladesh."

To attract these overseas savings, the government may consider revisiting the current features of Wage Earners Development Bond, and effectively promote sales of the USD Premium and Investment bonds, the central bank said.

News: The Daily Star / Bangladesh/ jan-31-2011