Cenbank introduces forex intervention strategy, eyes greater exchange rate flexibility

The Bangladesh Bank has outlined a foreign exchange intervention strategy to support the new exchange rate regime of a crawling peg with a band as a step towards a more flexible exchange rate.

According to a new guideline issued today (31 December), the strategy will serve as a transitional step towards greater exchange rate flexibility. It aims to enhance external macroeconomic balance, preserve reserve buffers, and improve monetary policy efficiency.

The strategy is expected to ensure the smooth functioning of the foreign exchange market while modernising monetary and exchange rate policies by defining clear FX intervention objectives and operations.

The daily recalibration of the band for the taka-USD exchange rate is central to maintaining stability and supporting the evolving financial system, a senior central bank official said.

Cenbank to announce reference dollar rate on 12 Jan

From 12 January onwards, the central bank will announce the daily reference benchmark exchange rate for the dollar. Banks will take the reference rate into account when buying and selling dollars.

The reference rate is a transactions-based foreign exchange market benchmark and is calculated as the weighted average exchange rate of spot foreign exchange market transactions conducted by banks for currencies where the taka is used as the counterpart currency in the transaction.

The Bangladesh Bank will periodically review the market turnover, market concentration and trade distribution metrics to develop additional measures, as needed, to ensure that the reference rate remains a reliable reference foreign exchange rate.

The reference rate will be published twice daily – at 12:30pm and at 6pm on each business day.

According to a circular issued by the central bank yesterday from its Foreign Exchange Policy Department, from now on, banks will be able to buy and sell dollars with customers or dealers at the "Freely Negotiated Rate." 

Additionally, from 5 January, banks will provide information twice on each business day for all foreign exchange transactions of $100,000 or more, or equivalent.

"Banks shall, before 11:30am report for transactions executed till 11am. In the afternoon, banks shall provide information of transactions executed from 11am to 5pm before 5:30pm,'' the circular reads.

A senior official of the central bank told TBS, "From 5 January onwards, banks will start reporting their rates. After a week-long review, we will calculate a weighted average rate and publish it regularly on our website from the 12th."

How Cenbank to intervene market

To intervene in the market, the Bangladesh Bank is introducing the Foreign Exchange Auction under the crawling exchange rate with the band arrangement. Access to the auction is granted to all banks who comply with all prudential requirements and regulations, including FX Guidelines, net open position limit and CRR fulfilment.

The auction is either a buy or sell of foreign currency against the taka depending on the position of the taka exchange rate and the defined bands, and the prevailing conditions of the domestic foreign exchange market. Interventions are conducted exclusively in the spot market.

The fixed exchange rate in auctions is equal to the exchange rate at the upper bound of the exchange rate band for interventions to sell foreign currency to banks. The fixed exchange rate in auctions is equal to the exchange rate at the lower bound of the exchange rate band for interventions to buy foreign currency from banks.

The central bank will announce the auction at 1pm on the day of the auction. Banks will be invited to place bids or offers to the Bangladesh Bank from 1pm to 2pm.

The central bank said banks violating the Auction Terms and Conditions and the Guidelines for Foreign Exchange transactions (2018) will be penalised according to penalties outlined under [section 23] of the Foreign Exchange Regulation Act 1947, and may be temporarily suspended from auction participation.

The circular reads, "Foreign Exchange (FX) intervention strategy is designed to support effective functioning of the new exchange rate regime of crawling peg with the band in Bangladesh. 

"Moving to this new exchange rate arrangement is itself a transitional step towards a flexible exchange rate, which will better support external macroeconomic balance, preserve reserve buffers, and improve efficiency of Bangladesh Bank's monetary policy. 

"Defining a consistent FX interventions strategy constitutes a critical element in modernizing monetary and exchange rate policy framework, strengthening the Bangladesh Bank operations, and ensuring smooth and free functioning of the FX market. For FX operations purposes the band recalculates the exchange rate on a daily basis.

"The objective of the FX interventions conducted by the Bangladesh Bank in the foreign exchange market is to ensure that exchange rate developments are consistent with the crawling peg with the band exchange rate arrangement.