The Centre for Policy Dialogue (CPD) today prescribed the Bangladesh Bank to increase the rate of cash reserve ratio to mop up the excess liquidity.

This will help the Bangladesh Bank implement the monetary policy for the fiscal year 2021-22 effectively.

The CPD came up with the recommendations at a press conference on "MPS FY2021-22: To what extent does the monetary policy meet the needs of the economy?"

The BB earlier reduced CRR, which determines the portion of customer deposits that commercial banks must keep as a reserve with the central bank, by 100 basis points to 4 per cent to offset the business slowdown from the pandemic.

A higher CRR means the banks must hold higher reserves and thus tighten the flow of cash.

The think tank also suggested the central bank to beef up its monitoring of the credit flow such that the excess liquidity could be barred from investing in the capital market.

The excess liquidity has already created a bubble to some extent in the capital market due to a lack of room to invest the fund in the productive sector, said Fahmida Khatun, executive director of the CPD.

The central bank should also gear up its supervision on the loans disbursed from stimulus packages, said Mustafizur Rahman, a distinguished fellow of the CPD.

There have been allegations that some portions of stimulus packages have been misused.

A section of borrowers has misused the loans, ignoring their commitment to invest in the productive sector.

Rahman also suggested the central bank to roll out a bond such that the remitters could invest their foreign fund in the instrument.

The central bank will be able to avoid injecting high-powered money (reserve money) in the market against the remittances if the remitters can invest their fund in the securities.

The high remittance flow has recently created an excess foreign fund in the money market, forcing the central bank to purchase the US dollar on a regular basis.