As the Bangladeshi taka started to regain value against the US dollar after several years of depreciation, the Bangladesh Bank (BB) purchased $484 million from several commercial banks through two auctions, effectively rolling back the gains.
In a first-of-its-kind auction in the floating exchange rate era, the central bank bought $171 million on July 13 before doubling down and purchasing a further $313 million on July 15.
This sparked a mixed reaction among experts and market stakeholders.
Many questioned why the central bank initiated the auction at a time when the taka was finally gaining some ground and what it means for the market.
Why did BB insist on higher floor prices?
Although commercial banks offered to sell dollars to the central bank at Tk 120 to Tk 120.50 per dollar, the central bank set a higher floor price, placing the cut-off rate at Tk 121.5 per dollar.
This signals BB's intention to boost the market rate and keep the dollar rate within a target range of Tk 122.50 to Tk 123.
As of July 17, the interbank dollar selling rate hovered around Tk 121.2 to Tk 121.3.
As the exchange rate recently dropped to around Tk 120, the central bank was prompted to intervene as a sharp drop in dollar prices would negatively impact exporters and remitters, two major contributors to the country's economy.
Bangladesh Bank's foreign currency reserves also edged up after the dollar purchases.
On Wednesday, Central Bank Spokesperson Arief Hossain Khan said the country's foreign exchange reserves rose to $24.99 billion under the IMF's BPM6 method, while gross reserves stood at $30.03 billion.
On July 7, the reserves stood at $24.45 billion, while gross reserves stood at $29.52 billion.
Inflation control vs hundi threat
The uninhibited rise of the US dollar, which has seen the taka lose nearly 30 percent of its value against the currency since the Covid-19 pandemic, has been a primary driver of economic strain in Bangladesh.
It has been a key factor behind soaring inflation, which remained stubbornly above 9 percent for 27 months before dropping below that mark in June.
However, as the local currency started to strengthen against the dollar due to record remittance inflows of $30.33 billion last fiscal year and robust export earnings of $48.28 billion, the exchange rate had dropped by Tk 2.20 since the start of July.
This prompted the BB to introduce the auction mechanism, allowing it to manage excess dollar supply.
While some experts opine that further depreciation of the exchange rate from 120 to 110 could have helped in curbing inflation, others believe that such levels of depreciation could inspire and activate the hundi market.
How managing excess supply keeps dollar prices stable
Mohammad Shafiqul Islam, chairman of the economics department of Jahangirnagar University, called the move a protective measure for exporters and remitters.
"A low dollar exchange rate can reduce exporters' and remitters' income in taka, discouraging their activities. By buying dollars, the central bank supports these groups, maintaining their financial stability, which is vital for Bangladesh's export-driven and remittance-reliant economy," he told Dhaka Stream.
"Moreover, commercial banks holding an excess amount of dollars not only risks the Net Open Position's [difference between a bank's foreign currency assets and liabilities] upper limit or long position, it may also create anarchy in the inter-bank selling rate," he added.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, appreciated the move.
"The taka should be appropriately priced – not overpriced, not underpriced. By buying dollars through auctions, the regulator acted to prevent excessive volatility. The central bank's higher floor rate underscores a proximity with the real effective exchange rate," he told Dhaka Stream, insisting that more would be clear after observing the market for seven to 15 days.
How dollar auctions help balance supply and demand
He also opined that the move aligned with the move to a market-based exchange rate system, which was prescribed by the International Monetary Fund.
"Although we agreed to a floating regime, it has not been totally activated yet. We are not fully prepared, therefore such interventions are needed," he said, hinting at the practice of keeping exchange rates within a band.
Under this system, instead of being completely determined by market forces, the central bank establishes a target value for its currency relative to a foreign currency, permitting the exchange rate to vary within a defined range, or "band," around that target.
According to the Bangladesh Bank officials, the central bank can indirectly influence the exchange rate through such auctions without directly fixing the price, thereby offsetting the supply-demand imbalances from rising remittances and declining imports.
Moreover, they said that by absorbing dollars, the central bank is ensuring the taka remains competitive and sheds excessive volatility. The central bank's aim is to prevent the taka from depreciating too rapidly, which could harm exporters' competitiveness.
The Bangladesh Bank's proactive approach underscores its commitment to fostering stability and sustaining growth for Bangladesh in a dynamic global market, per the BB officials.
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