Bangladesh Bank buys $171m at higher rate in first-ever auction

In an unprecedented move, the Bangladesh Bank has for the first time purchased $171 million from commercial banks through an auction, responding to a sharp tendency of the dollar exchange rate to fall because of increased greenback inflow into the market.

Bite-Sized: How a central bank dollar auction works and why Bangladesh just used one

Crucially, the central bank set a cut-off rate of Tk121.50 for these dollar purchases, a rate higher than the approximately Tk120 offered by most banks. This strategy ensured that even banks willing to sell dollars at lower rates received a higher price, according to experts. 

Primarily, by setting this higher cut-off rate, the central bank aims to signal to the market that the dollar rate will not fall below this level for now, or that the central bank itself is prepared to buy dollars at a higher price to maintain stability, officials say.

The central bank set the cut-off rate at Tk121.50 based on REER (Real Effective Exchange Rate) which stood at Tk121.13 at the end of June, according to a policy-making official of the central bank.

Md Kabir Ahmed, deputy governor of the Bangladesh Bank, told TBS, "We have not yet specified the amount of dollars we will purchase from the market. We will continue to buy dollars through auctions like this whenever deemed necessary, based on market conditions." He added that the transactions, initiated yesterday when international dealings were closed, will be executed today.

Why higher cut-off rate?

A deputy managing director from a top-tier private bank explained why the central bank might have offered a rate higher than banks' initial bids. "The market was in a state of panic due to the rapid depreciation of the dollar. Given our very strong dollar inflows, there was a real risk of the rate falling even further," he stated. 

"While a lower dollar rate benefits importers, it would significantly harm exporters and remitters. It also posed a threat of a portion of remittances diverting to unofficial channels like 'hundi.' Therefore, by purchasing dollars at a higher price, the central bank has signalled to the market that the rate should appreciate," said the banker.

The central bank's move marks a pivotal shift from its previous fixed-rate purchasing system and aligns with a key condition of the International Monetary Fund (IMF) loan, which mandated the introduction of a market-based exchange rate from mid-May. When securing the loan, the central bank assured the IMF it would no longer intervene directly in the market as before, opting instead to buy at market rates should the need arise. "It is in accordance with this understanding that the central bank organised this auction," said another central bank official.

He noted that the dollar auction policy was approved yesterday morning. Under this new policy, an auction committee was formed, enabling banks with excess dollar holdings to participate and offer their selling rates. Banks were invited to submit their bids via email by 4pm yesterday, with 8-10 banks ultimately participating in the auction.

Welcoming the central bank's move, Sheikh Mohammad Maroof, managing director of Dhaka Bank, said, "When dollar inflow into the market significantly increases, central banks buying dollars from the market is a globally recognisedmethod," he said. "Every central bank aims to maintain its exchange rate within a calculated range, and they buy or sell dollars to maintain that range."

'Bangladesh not in a position for currency appreciation'

Maroof argued that Bangladesh is not yet in a position for currency appreciation. "Countries like India and Sri Lanka, our competitors, regularly depreciate their currencies. We had held our currency from depreciating for a long time, which created pressure on the exchange rate," he observed. "Currently, the dollar's value is on a downward trend due to increased inflows and subdued demand. However, this trend is temporary, not long-term. Our overall economic situation does not yet support currency appreciation."

A deputy managing director from one of the participating banks said, "With the dollar's value falling over the past few days, no bank wants to hold onto excessive dollars. There were even some banks that couldn't find buyers or satisfactory rates when trying to sell dollars in the interbank market, causing some panic which further influenced the dollar's price." 

He expressed hope that the central bank's intervention through the auction could help reverse the dollar's continuous downward trend.

Shifting demand and supply

Banks reported that they offered a rate of Tk120 for remittance dollars last Thursday. While many claimed to have purchased remittance dollars at Tk120.50, foreign exchange houses selling remittances reported that by the end of Thursday, no bank was willing to offer more than Tk120, despite rates being 20-50 paisa higher earlier in the day. Earlier in the previous week, banks had offered Tk122.80-122.90 for remittance dollars.

For several years, the dollar market was characterised by demand significantly outstripping supply. This was largely due to substantial outstanding government import payments, which created significant dollar demand from state-owned banks. Additionally, many private import Letters of Credit (LCs) were in arrears, and as the dollar's value rose, businesses quickly sought to settle these payments, intensifying market pressure.

However, a managing director from another bank noted a significant shift in dollar demand due to a lack of import LC opening. "Currently, investment is almost negligible, which means imports of capital machinery and raw materials are significantly down."

He continued, "A large portion of current imports comprises essential consumer goods, which typically remain static. Furthermore, previous overdue import payments have now been cleared. Consequently, dollar demand is unlikely to rise quickly.

"On the other hand, our remittance inflows are very strong, and export proceeds are also coming in well. Overall, dollar supply is robust, leading to high dollar availability in banks."