The interbank forex market, which had remained inactive for the last five months amid high exchange rate volatility, resumed on Monday with sales of dollars at Tk103.50 each after banks fixed uniform rates for exporters and remitters.

The Bangladesh Bank too will readjust the current interbank exchange rate, Tk95, within a week in keeping with the new rate set by the banks based on market demand.

As a result, the country will see a massive devaluation of taka, leading to significant changes in some economic indicators, such as per capita income and GDP, which are calculated in dollars.

Meanwhile, the Bangladesh Bank also devalued taka by Tk1 on Monday, selling $65 million to banks at Tk96 per dollar.

The devaluation of taka against the US dollar comes with an inflationary pressure – but this time prices will not further heat up as import LC (letter of credit) settlements that have been at above Tk105 for the past few months have already had an impact on inflation, say industry insiders.

Seeking anonymity, a senior executive of a private bank said the Tk95 interbank exchange rate has now become invalid now as banks started transactions with each other at a new exchange rate.

The Bangladesh Bank will follow the interbank exchange rate when it sells dollars to banks.

Asked if taka would be devalued, Md Serajul Islam, executive director and spokesperson of the central bank, said as interbank transactions resumed, the Bangladesh Bank does not now need to sell dollars to banks.

The decision on devaluing taka against the greenback will be taken only when the Bangladesh Bank needs to inject dollars into the market, he added.

At present, the central bank sells dollars to banks at the interbank exchange rate only for government LCs.

The resumption of interbank forex transactions is a great relief for bankers as it will reduce the dollar rate volatility, said Mashrur Arefin, managing director of the City Bank.

When the interbank market opens, foreign exchange houses do not get a chance to charge banks high for remittances, he noted.

The interbank exchange rate will be reviewed from time to time based on market demand – so the rate will come to a stable position in a week, he also said.

The interbank forex market became inactive in April due to the wide gap between the inter-bank exchange rate of Tk 86 and the open market rate of Tk90 and above.

The Bangladesh Bank continuously devalued taka in line with rising demand and the last devaluation was done on 11 August, setting the interbank exchange rate at Tk95. Although the rate was not followed by banks as the dollar rate in the open market went up to Tk112 for import LC payments.

In this situation, the Bangladesh Bank instructed banks to go for uniform rates. Later, the Bangladesh Foreign Exchange Dealers Association and the Association of Bankers, Bangladesh fixed the dollar rate at Tk108 for remitters and Tk99 for exporters, which came into effect from Monday.

The rate for import LC settlements will be fixed by calculating the average remittance and export bill rates with a maximum increase of Tk1, according to their new formula.

On the first day of execution of new rates, two private banks, Prime and Mutual Trust Bank, sold dollars at Tk103.50 in the interbank money market.

The Bangladesh Bank should go for taka devaluation if it needs to keep a single interbank exchange rate in the market, said Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh.

The Bangladesh Bank cannot afford to lose forex reserves anymore by selling dollars at lower than market rate, he added.

But he disagreed with the two different rates for remitters and exporters.

How uneven dollar rates lead to depletion of forex reserves

The Bangladesh Bank has retained the interbank exchange rate at Tk95 when the market rate is above Tk100. As a result, banks, which have high dollar holdings, are unwilling to sell dollars to other low foreign exchange earner banks at the interbank exchange rate. Even state-owned banks, which make payment for government LCs, are unwilling to open LCs at the market rate.

In this situation, Bangladesh Bank is selling dollars to banks to meet their demand, causing an erosion of forex reserves. The foreign exchange reserve came down to below $38 billion last week, which had been above $40 billion for several months.

The resumption of the interbank forex market will give the Bangladesh Bank relief from selling dollars as banks will get supply from interbank transactions, said bankers.