For the first time ever, Bangladesh Bank has bought $171 million through an auction from commercial banks. This move comes as a strategic decision to prevent the US dollar’s value from falling further in the local market.
Why Did the Central Bank Offer a Higher Cut-Off Rate?
In this auction, Bangladesh Bank set a cut-off rate of Tk 121.50 per dollar, even though most commercial banks offered to sell dollars at around Tk 120.
According to experts, this higher rate sends a strong message to the market — that the dollar price will not fall below a certain level and that the central bank is willing to buy dollars at a higher price.
One policy maker from Bangladesh Bank explained that the rate was set based on the Real Effective Exchange Rate (REER), which was Tk 121.13 at the end of June. That’s why the cut-off rate was decided at Tk 121.50.
Market Reaction: Why This Was Needed
A Deputy Managing Director of a leading private bank said the falling dollar price had created panic in the market. As the flow of dollars increased, prices began to drop.
“Importers might benefit from a cheaper dollar, but exporters and those who send remittances suffer. If the price falls too much, more remittances may be sent through illegal channels like hundi,” he added.
By buying dollars at a higher rate, the central bank wanted to send a signal that the dollar price would not fall further and help stabilize the market.
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New Market-Based Policy Under IMF Conditions
Previously, the central bank used to set a fixed rate to buy dollars directly from banks. But under conditions set by the International Monetary Fund (IMF) during a loan agreement, Bangladesh Bank stopped directly interfering in the market from mid-May.
Instead, it promised the IMF that future dollar purchases would be made at market rates. This is why the central bank has now adopted an auction system to buy dollars from banks.
A new auction committee has been formed under this policy. Banks with extra dollars were invited to submit price offers via email by 4 PM on Sunday. Around 8 to 10 banks took part in this auction.
Deputy Governor: Dollar Purchases Will Continue as Needed
Deputy Governor Md. Kabir Ahmed told The Business Standard that the central bank hasn’t yet decided how much dollar it will buy in total.
“We will continue to purchase dollars through auctions depending on market conditions,” he said.
Though the process started on Sunday, the actual transaction would be completed on Monday, as there was no international trading on Sunday.
Bankers Welcome the Move
The Managing Director of Dhaka Bank, Sheikh Mohammad Maroof, welcomed the step by Bangladesh Bank.
“This is a globally accepted method. Central banks often buy or sell foreign currency to maintain exchange rates within a reasonable range,” he explained.
No Room Yet for Currency Appreciation
Maroof also noted that Bangladesh is not yet in a position to appreciate the value of the Taka. He mentioned that countries like India and Sri Lanka regularly devalue their currencies to stay competitive.
“We didn’t devalue our currency for a long time, which caused pressure on the exchange rate. While the dollar is getting cheaper now due to higher supply and low demand, this trend is temporary, not long-term,” he added.
Falling Demand and Higher Supply of Dollars
One Deputy Managing Director of a bank involved in the auction said that no bank wants to hold excess dollars now due to continuous price drops. Some banks even failed to find buyers in the interbank market at their desired rates, causing further panic and price drops.
The central bank hopes that this new auction-based buying method will help stabilize the falling dollar price.
Shift in Demand and Supply of Dollars
Banks said that last Thursday, they offered to buy remittance dollars at around Tk 120. Some banks even paid Tk 120.50. However, exchange houses said that by the end of the day, no bank was willing to pay more than Tk 120.
In contrast, earlier last week, the dollar rate for remittances was Tk 122.80 to Tk 122.90. This shows how fast the price dropped recently.
Why Dollar Demand Has Gone Down
For the past few years, the demand for dollars was higher than the supply, mainly because many government import payments were pending. State-owned banks had to buy dollars to clear these payments.
Also, many private importers had unpaid Letters of Credit (LCs) and wanted to pay quickly as the dollar price was going up — this added more pressure to the market.
However, now, the demand for opening new LCs has fallen, according to one bank’s managing director.
“There is hardly any investment happening, so there is no need to import capital machinery or raw materials,” he said.
“Most current imports are just daily consumer goods, and their import volume stays quite stable. Plus, most of the overdue payments have already been cleared,” he added.
Dollars Are Now More Available
The same managing director also said that remittance inflow is now strong, and export earnings are also coming in well.
As a result, the availability of dollars in banks has increased significantly, making it easier for the central bank to step in and stabilize the market.
Source: TBS
