Forward dollar rate should be based on Fed rate: Bangladesh Bank
“However, as SMART is no longer effective, banks are facing challenges in determining the premium for forward deals. For these reasons, new instructions have now been issued to the banks,” said a central bank official
The Bangladesh Bank has introduced a new policy that will require the country's banks to consider the US Federal Funds Rate when determining rates for forward dollar transactions.
The Foreign Exchange Policy Department of the central bank issued a circular to this effect on Sunday (26 January).
"To maintain orderly discipline in the foreign exchange market, it has been decided that banks may apply forward premium not exceeding the policy rates [US Dollar (USD): Federal Funds Rate, Euro (EUR): Main Refinancing Rate, British Pound (GBP): Bank Rate, Japanese Yen (JPY): Overnight Call Rate, Chinese Yuan (CNY): Loan Prime Rate (LPR) etc.] of the respective currencies as in effect on the banking day immediately before the first day of the deal period for forward dealings with customers and/or relevant counterparties," reads the circular.
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"The above forward premium shall be applicable with the declared spot rates for both forward sale and purchase. For early settlement of a forward contract, the premium needs to be adjusted for actual tenure," it adds.
A senior official of the central bank, while speaking with TBS, said previously, banks were instructed to consider the Six-months Moving Average Rate of 182-day Treasury bills (SMART) for forward deals.
"However, as SMART is no longer effective, banks are facing challenges in determining the premium for forward deals. For these reasons, new instructions have now been issued to the banks," he said.
The central bank official commented that banks can now conduct forward deals for any duration if they wish, stating that under the previous instructions, banks were limited to a maximum of 3 months for buying and selling dollars in forward deals.
"This restriction has now been removed. From now on, banks can carry out forward deals for any timeframe they choose," he said.
In the circular, the central bank states that banks are advised to instruct all their Authorized Dealer branches and central processing centres for meticulous compliance with the above instructions.
"Non-compliance shall be subject to punitive actions including financial penalties under relevant regulations, including but not limited to the Foreign Exchange Regulation Act, 1947 and the Bank Company Act, 1991," it added.
