Bangladesh Bank has adopted a new strategy to rein in the rising dollar price, selling US dollars from its foreign exchange reserves to commercial banks through an auction for the first time.

The central bank organised an auction on Monday with a target of selling $20 million, but ultimately sold a total of $11.5 million to six banks. The exchange rates ranged from Tk122.80 to Tk123.35 per dollar, meaning about 58% of the targeted amount was sold.

Bankers said many banks could not participate fully because it was the first auction of its kind and the process was arranged at short notice.

A senior Bangladesh Bank official said the central bank intervened in the market to prevent the dollar exchange rate from rising further. At the same time, the move sent a message to the market that Bangladesh Bank could sell dollars from its reserves if demand pressures pushed up the exchange rate. Similarly, the central bank could purchase dollars from the market if foreign currency inflows increase.

Previous System Involved Direct Sales

Bangladesh Bank had supplied dollars from its reserves to the market even after the foreign exchange crisis began in mid-2022. However, instead of open auctions, it directly sold dollars to selected banks to meet the needs of specific customers.

A senior official of a commercial bank described the previous system as “unreasonable, inefficient and unprofessional.” According to him, there was no scope for market-based competition because the central bank decided which banks would receive the dollars.

Under the new system, the auction was open to all commercial banks. Bangladesh Bank sold the dollars to the banks that offered the highest bids.

Why the Market Came Under Pressure

The central bank initiated the auction while the dollar exchange rate was on an upward trend. The rate for settling letters of credit (LCs) rose to Tk123.45 per dollar on Monday, up from Tk123.10 the previous Thursday. A week earlier, the dollar rate was below Tk123.

A senior official of a commercial bank said many banks may not have been fully prepared to participate because the auction was being held for the first time and the process was new.

He said Bangladesh Bank informed banks about the auction after 1pm. By then, many banks had already arranged the dollars needed for their routine transactions and various payments. He believes participation in such auctions could increase in the future.

Higher Remittance House Rates Add Pressure

Several remittance houses offered to sell dollars to commercial banks at Tk123.40 each on Monday morning. They later raised the rate by another 20 paisa to Tk123.60. However, several banks were unwilling to buy dollars at the higher rate.

Bankers said the higher rates demanded by remittance houses had created upward pressure on the dollar exchange rate in the market.

A leading business group in Bangladesh also told The Business Standard that banks had offered them a rate of Tk123.45 per dollar for LC settlement on Monday. In contrast, Bangladesh Bank supplied dollars through the auction at rates ranging from Tk122.80 to Tk123.35.

As a result, bankers expect dollar rates in both the LC settlement and remittance house markets to decline somewhat today.

They believe remittance houses will find it difficult to maintain a rate of Tk123.60 per dollar because the central bank supplied dollars from its reserves at comparatively lower rates. This could create further downward pressure on the dollar’s market price.

Bangladesh Bank Takes on the Role of Seller

Earlier this month, Bangladesh Bank purchased a total of $50 million from four commercial banks at Tk122.75 per dollar.

Until now, the central bank had mainly purchased dollars from commercial banks to increase its foreign exchange reserves. This time, however, it sold dollars from those reserves to banks through an open auction for the first time.

Bankers view the move as direct market intervention by Bangladesh Bank aimed at containing excess demand for dollars and preventing the exchange rate from rising further.

Source: The Business Standard (TBS)