BB takes steps to mitigate volatility in the forex market

The Bangladesh Bank yesterday lifted the cap on interest rates on foreign currency deposits from non-residents to increase the supply of US dollars and stop the current volatility in the foreign exchange market.

The move follows a series of moves by the central bank to halt the weakening of the Bangladeshi taka against the US dollar which broke through the 100 Tk mark for importers last week.

The FX market was flat yesterday as pressure from import payments was weak as it was a weekly bank holiday in major global markets.

Bangladesh Bank had previously instructed banks to set the interest rate based on euro deposit rates tracked by eurozone lenders.

Local banks offered interest rates ranging from 0.25% to 0.80% to the depositor as per the instruction of the BB.

Banks are now allowed to circumvent such caps to mobilize deposits from non-resident Bangladeshis and individuals of Bangladeshi origin, including those with dual nationality, according to a notice from the BB.

The removal of the interest rate cap will also apply to foreign companies, companies registered or incorporated abroad, as well as banks and other financial institutions, including institutional investors.

In addition, banks can also manage foreign currency funds from industrial units wholly owned by foreign nationals and entities in export processing zones and economic zones.

Officials of two banks said the banks had made little effort to raise these funds from customers. Also, depositors do not feel encouraged to keep their funds in banks due to the low interest rate.

But the latest easing of the interest rate cap on non-resident foreign currency deposits will give banks a boost to raise their currencies.

In another move, the central bank also took the decision to reduce the net open position, a limit for banks to hold foreign currency.

Under the new net open position limit, banks will be allowed to hold 15% of foreign currency in their capital, up from 20% previously.

Banks generally manage foreign currency from shippers, exporters, and several other sources, but they do not keep all funds in their respective custody.

Lenders must transfer excess foreign currency to the central bank after ascertaining their net open position limit.

A BB official said that the country’s foreign exchange market is now facing a severe shortage of US dollars, which is why the central bank has reduced the net open position limit in order to increase the supply of the greenback on the market.

About $670 million will be pumped into the market due to BB’s latest move.

The central bank yesterday issued a letter to all banks to this effect.

The country’s foreign exchange reserves are now declining due to increased import payments.

The country’s foreign exchange reserves stood at $39.70 billion on July 14 from $46.15 billion in December last year.

In this context, the local currency exchange rate has fallen sharply in recent times.

The interbank exchange rate of the taka stood at 93.95 Tk to the dollar yesterday, down 10.79% year-on-year.

About Rodney Fletcher

Check Also

Sri Lanka wrong to scapegoat expatriate workers for Undiyal: Bellwether

ECONOMYNEXT – Sri Lankan authorities are targeting and blaming workers in the Middle East for …