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TOPIC :- FUNCTION OF BANGLADESH BANK AND IS CONDUCT MONETARY POLICY

Introduction Bangladesh Bank (BB) has been working as the central bank since the countrys independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. BB is also responsible for planning the governments monetary policy and implementing it there by. The BB has a governing body comprising of nine members with the Governor as its chief. Apart from the head office in Dhaka, it has nine more branches, of which two in Dhaka and one each in Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Rangpur and Barisal.

Major Functions of Bangladesh Bank 1. Issue of notes and coins: The first and foremost function of central bank is to issue notes and coins as per needs of the public and requirement of business and commerce. 2. Government bank: Central bank acts as a banker and economic adviser of the government. The central bank conducts and maintains government accounts for all government receipts and payments. 3. Bankers bank: Central bank acts as a bankers bank. As a rule, all

scheduled commercial banks have to maintain SLR (Statutory Liquidity Reserve) 18% with Bangladesh bank. (CRR 5.5% and Bond securities 13.5%)

4. Lender of the last resort: In case of crisis situation of commercial banks, central banks acts as
lender of the last resort by lending against first class securities, bill of exchange etc. 5. Reservoir of foreign currency: Central bank maintains foreign currency reserve. For the purpose of control of foreign currency, the following factors are responsiblea. For issuance of notes. b. For payments of liabilities of banks. c. for payment of foreign debts.

6. Clearing house: Central bank acts as a clearing house for settlement of inter-bank receipts and payments. 7. Control currency market: Central bank acts as a guardian of the currency market. For the purpose of formation, control and maintenance of currency market and overall development, central bank is responsible. 8. Stabilize price level: Fluctuations and frequent changes of price-level affect economic growth. With a view to making good of the economic imbalance and crisis situations, central bank takes necessary measures for stabilizing the price level. 9.Employment opportunities: Central bank takes initiatives for creating employment opportunities by means of credit control mechanism.

Monetary Policy
Monetary policy is the process by which the government, central bank, or monetary authority of a country controls a) The supply of money, b) Availability of money, and

c) Cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.
d) Monetary theory provides insight into how to craft optimal monetary policy.

Tools of monetary policy Major instruments of monetary control available with Bangladesh Bank are the bank rate, open market operations, rediscount policy, and statutory reserve requirement. The methods of credit control can be classified as follows:
Quantitative/ General Methods 01. Bank rate policy 02. Open market policy Qualitative/ General Methods 01. Rationing of credit 02. Direct action

03. Variation of reserve ratio

03. Regulation of consumers credit 04. Moral persuasion

05. Publicity

Major Monetary Policy Instruments Use by Bangladesh Bank

1. Bank rate Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply.

Impacts of Bank Rate Changes BB(Bank rate) CB(Interest rate) Borrowers(Advance) Effects: Increase (cost of credit, unemployment, price level); Decrease (Production, export, investment). Effects: Increase (other interest rate, investment, and export); Decrease (leakage of domestic capital, price level, import). Effects: An stable situation is found

Increase= ;

Decrease= ;

Stable=

BB: Bangladesh Bank;

CB: Commercial Bank.

2. Open market operations Open market operations are the means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. This involves meeting the demand of base money at the target rate by buying and selling government securities, or other financial instruments. Monetary targets such as inflation, interest rates or exchange rates are used to guide this implementation.

3. Statutory Liquidity Ratio(SLR) The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. In terms of section 33(1) of the Bank Company Act of 1991, the Statutory Liquidity Requirement (SLR) is the minimum (in percentage of total time and demand liabilities) that a scheduled bank has to maintain in liquid assets with BB. The rate was set at 18 percent since 2005. Specialized banks are exempted while banks guided by Islamic laws are required to keep reserve at the concessional rate of 10 percent. The objectives of SLR are:

To restrict the expansion of bank credit.

To augment the investment of the banks in Government securities. To ensure solvency of banks. Value and Formula The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank. SLR Rate = Total Demand/Time Liabilities x 100%

4. Cash reserve requirement (CRR) The cash reserve requirement (or required reserve ratio or only reserve requirement) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. BB requests banks to keep five percent of their demand and times liabilities on account at the central bank. Cash in till is not eligible for the CRR.

Impacts of SLR & CRR

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) for scheduled banks are the other monetary policy tools, used sparingly in situations of drastic imbalances from major shocks.

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