Cenbank’s dollar purchase through auctions slows down interbank forex trading

The Bangladesh Bank's recent dollar purchases from commercial banks through auctions have reduced interbank foreign exchange transactions in August, according to the central bank's latest report.

Data from the Exchange Rate and Foreign Exchange Market Dynamics report, prepared by the Monetary Policy Department, show a sharp fall in both spot and swap transactions compared with July.

The daily average spot transaction dropped to $33.23 million in August from $40.75 million in July, while average daily swap transactions slid to $77.04 million from $86.94 million. In June, spot transaction was $68.70 million, while swap was $113.50 million.

Infographics: TBS

A treasury head at a private bank said auctions have indeed slowed interbank trading. "However, with ample dollar supply, even banks with high demand can meet their needs. The system is stable, and no artificial shortage is emerging," he said.

The Bangladesh Bank bought $454 million from the market in August to ease appreciation pressure, fixing the interbank exchange rate at Tk121.69 per dollar at month's end.

Bankers, economists, and central bank officials said the decline is mainly due to the central bank's auction-based dollar purchases.

A senior Bangladesh Bank official said if the central bank did not buy dollars through auctions, commercial banks would have sold them to other banks in the interbank market.

"That volume is now being added to the central bank's reserves instead of circulating through interbank transactions," the official told The Business Standard.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, said the central bank's auction-based dollar purchases are appropriate amid robust export and remittance growth.

He added that the dollar rate has stayed above Tk121.50 but below Tk122 for the past six weeks, indicating that both the market and the exchange rate remain stable. Any appreciation of the taka could pose risks to exports and remittances, which the central bank is rightly trying to avoid.

The economist further said the auctions are helping to build up the foreign exchange reserves, which will strengthen Bangladesh's capacity to withstand future external shocks.

"The reserve build-up from these purchases will help cushion potential shocks, such as tariff hikes or other external disruptions," he added. "Bangladesh Bank is pursuing a policy aimed at maintaining exchange rate stability and keeping inflation under control."

Policy to strengthen reserves

Holding surplus dollars brings little return for banks, according to bankers. Banks usually sell them to other banks in the interbank market. When interbank demand weakens, banks instead sell their surplus dollars to Bangladesh Bank.

Since July, the central bank has been purchasing dollars through auctions to absorb excess supply stemming from strong export earnings and remittance inflows. The move aims to maintain the exchange rate above Tk121 and prevent depreciation.

Banks also use swaps when they need temporary access to taka or dollars, exchanging currencies for a fixed period before reversing the transaction.

So far, Bangladesh Bank has bought around $1.88 billion through auctions since July. A senior official said the move has eased earlier liquidity tightness by injecting about Tk23,000 crore into the banking system.

As a result, banks' demand for liquidity has declined. Lower import payment requirements have also reduced the need to borrow dollars from other banks. Additionally, the central bank's liquidity support through repo operations has ensured sufficient cash flow across the sector.

Mohammad Hatem, president of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), told TBS that the dollar rate is currently stable and without intervention from the central bank, it could have fallen. 

"A higher rate would increase exporters' earnings. Stability in the dollar helps businesses make informed decisions, benefiting overall exports and importers. Therefore, it is essential that the dollar rate remains at this stable level," he said.

'Deposit, lending rate may decline'

Abidur Rahman Chowdhury, managing director (current charge) of Southeast Bank, told TBS that due to strong remittance and export growth, dollar supply in banks is healthy. 

"The central bank's dollar purchases have injected this amount into the market, boosting liquidity in banks. As a result, Treasury bill and bond interest rates have fallen, and deposit and lending rates are also expected to decline soon," he added.

This month, interests on Treasury bills of all maturities have fallen into the single digits. In addition, yields on 10-, 15-, and 20-year Treasury bonds have dropped below 10%, he said.

A senior treasury official at a private bank told TBS that if Treasury bill and bond rates continue to decline, deposit rates will also fall, which could have a broader impact on overall interest rates.

IMF band guides interventions

Bangladesh Bank officials said the central bank is buying dollars to keep the exchange rate within a band set under IMF guidelines. 

The band is calculated using the currencies of five major trading partners. When the rate approaches the lower limit, Bangladesh Bank intervenes by purchasing dollars; when it nears the upper limit, it sells. The exact band is not disclosed to prevent market manipulation.

One official added that interbank transactions have declined due to these auction-based purchases, but the approach is helping to stabilise the exchange rate without creating artificial distortions. 

"Our interventions strictly follow the IMF-prescribed band, ensuring market discipline," the official said.