In a flurry of moves over the past seven days, the finance ministry and the Bangladesh Bank undid the tight monetary stance announced in January for the second half of the fiscal year.

For instance, the finance ministry yesterday issued a notice clearing the way for private banks to keep 50 percent of the government funds, in a development that will go on to ease the ongoing liquidity crunch in the financial sector.

Previously, private banks could hold 20 percent of the funds for annual development programme and 25 percent from the revenue budget.

The move comes in the backdrop of the liquidity crisis among banks that began in November last year and went on to hit the stockmarket too.

Earlier on Friday, Finance Minister AMA Muhith held a meeting with the directors and managing directors of banks in which he agreed to double the government deposits for private banks.

The meeting was followed up with another on Sunday at the capital's Pan Pacific Sonargaon hotel, which was attended by Bangladesh Bank Governor Fazle Kabir.

A number of directors from private banks led by Nazrul Islam Mazumder, chairman of the Bangladesh Association of Banks, attended the closed-door meeting.

Eunusur Rahman, senior secretary of the Financial Institutions Division, told The Daily Star that the notice will come into effect from March 31. Apart for this, the banks' cash reserve requirement (CRR) was cut by one percentage point and set at 5.5 percent, Muhith told reporters after the meeting on Sunday.

The CRR is a specified minimum fraction of the total deposits that banks must hold as reserves either in cash or as deposits with the central bank.

It was also decided at the meeting that the repo rate would be lowered to 6 percent from 6.75 percent.

Repo rate is rate at which banks take loans from the central bank. Lowering of the repo rate means troubled banks can borrow from the central bank at a cheaper rate.

The moves are in stark contrast to the central bank's January announcement of a tight monetary policy for the second half of the fiscal year with the view to restraining banks from going for aggressive lending and containing inflation.

As of yesterday, the BB has not issued any notice about the slash in CRR and repo rate.

However, some economists termed the hurried moves of the BB and the government as an expansionary policy ahead of the national elections. Given the serious governance problems in some bad private banks in recent times, the government moves may result in misuse of the additional fund that would subsequently flow in to the money market, they said.