The omens were worrisome for the call money market right in the morning. The day started with a nationalised commercial bank asking 40 percent interest on called money. From then on the rate continued a relentless spiral, with all the private banks lending money at more than 100 percent interest rates.

At one point, a private bank handed out a loan to a leasing company at 150 percent interest that really shook the market and even the central bankers. But it was already evening and the transactions had nearly come to an end. Still, the BB imposed the 40 percent ceiling for the day's call-money transactions and warned the banks of punishment if the cap was violated, a market source said.

However, the central bank seemed embarrassed for its out-of-the-way intervention in a free market. BB officials outright denied the call money rate hike and the central bank's move to reporters.

BB General Manager KM Jamsheduzzaman claimed the rate had never exceeded the 40-to-50 percent range yesterday and said, "We never persuade the banks to do anything."

But, a market source said, "In the afternoon, central bank officials phoned all the banks, asking them to bring down the rates of yesterday's call money transactions to 40 percent."

As a result of the BB diktat, many of the banks that handed out loans yesterday will not get the 'extra' profit they were hoping for, while those who borrowed will be spared of the 'extra' cost.

For instance, a source said the 40 percent ceiling has 'saved' about Tk 28 lakh of one bank, "which borrowed money at 120 percent interest."

WHY DID IT HAPPEN
Normally, the call money rate does not exceed 10 percent.

But, as the Bangladesh Bank since early this month has more frequently been using reverse Repo (repurchase agreement) to withdraw money from the market, a liquidity crisis emerged, pushing the call money rate up to a range between 15 and 40 percent.

Pubali Bank Managing Director Khandker Ibrahim Khaled held two major factors responsible for yesterday's bizarre phenomenon. "It was the last day for the banks to maintain their cash-reserve ratio [CRR, 5 percent on average]. To attain that, many banks had to borrow heavily, pushing up the call money rate," he cited as one of the factors.

The second factor, he said, was the reverse Repo by which the central bank yesterday withdrew Tk 444 crore from the already cash-starved market.

On the reason for withdrawing so much money from the market by the BB yesterday, Jamsheduz-zaman said the central bank assumed the liquidity situation of the banks was healthy.

Reflecting on yesterday's hue and cry, Centre for Policy Dialogue (CPD) Executive Director Debapriya Bhattacharya said, "It is an expression of mismatch between aggregate demand and investable surplus. Since the government has not got enough foreign aid as projected, it has probably exhausted its limits for borrowing from banks and possibly resorted to reverse Repo to meet its expenditure demand."

"Given the general shortage in liquidity in the financial sector," he went on, "the Bangladesh Bank needs to meet its quarterly monetary target set by the IMF, resulting in such a situation."

According to Debapriya, "This shows the mismatch between the fiscal and monetary policies. The central bank is also possibly trying to protect the value of taka and has thus mopped up the resources. One has to take a deeper look at the aggregate demand, management and the complimentality between the monetary and fiscal policies."