The Bangladesh Bank has informally advised commercial banks to exercise restraint in undertaking forward dollar bookings, with the objective of preventing pressure on the spot foreign exchange market and containing volatility in the exchange rate.
Central bank officials stated that the guidance was issued after a number of banks significantly increased forward booking activities in response to heightened geopolitical tensions in the Middle East. Concerns over a potential rise in the US dollar prompted businesses and financial institutions to secure forward contracts as a hedge against exchange rate fluctuations.
A forward foreign exchange transaction is an agreement to sell a specified amount of foreign currency at a predetermined rate on a future date. Such arrangements are commonly used to manage exposure to currency risk. Under existing regulations, authorised dealer banks may engage in forward sales only to meet genuine client requirements and must ensure that the transactions are structured to offset exchange rate risk.
Banks are permitted to purchase foreign currency forward from exporters, foreign currency account holders, exchange houses and other counterparties. However, they are required to cover their own exposure promptly. The forward rate is determined by adding a premium to the prevailing spot exchange rate.
Officials said banks have been instructed not to use dollars sourced from the spot market to meet forward commitments. Instead, forward sales should be backed by corresponding forward purchases. A senior official noted that a small number of banks had been increasing forward commitments at a rapid pace, raising concerns about potential imbalances in the market.
He explained that excessive forward selling can lead to increased demand in the spot market if banks later struggle to obtain sufficient foreign currency to honour their contracts. This, in turn, may exert upward pressure on the exchange rate. The official also observed that some of the banks involved had previously contributed to instability in the foreign exchange market in May 2022 through substantial dollar purchases. He added that timely intervention had prevented the current situation from worsening.
Demand trends and market response
Industry participants reported that demand for forward bookings rose sharply from mid-March and remained elevated until the first week of April. Although demand moderated somewhat by mid-April, businesses continue to show interest in locking in exchange rates due to ongoing uncertainty.
| Period |
Demand Pattern |
Primary Factors |
| Mid-March–Early April |
Strong increase |
Geopolitical tensions, currency expectations |
| Mid-April |
Partial easing |
Improved short-term liquidity |
| Outlook |
Potential rise |
Continued uncertainty, external risks |
Bankers indicated that demand could increase again if geopolitical tensions persist or if global supply routes, including the Strait of Hormuz, face disruption. However, many banks are constrained by limited forward purchase positions, which restrict their ability to expand forward sales in line with regulatory expectations.
Several large corporate groups have reportedly encountered difficulties in securing forward contracts, as banks comply with the central bank’s guidance. At the same time, the regulator has sought detailed information from banks regarding the methodologies used to determine forward rates following the recent surge in demand.
Despite increased interest in forward contracts, bankers said overall dollar liquidity remains stable. The exchange rate has shown signs of easing after a brief increase, supported by central bank operations, including dollar purchases from commercial banks at Tk122.75 through auctions.
A senior official at a private company reported that an import letter of credit was settled at Tk122.98 per dollar last Wednesday, compared with Tk123.10 on the previous day, indicating a marginal decline.
Expert opinions
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, questioned the assertion that forward booking itself would drive an increase in the exchange rate. He stated that exchange rate movements in Bangladesh broadly reflect trends in international markets, particularly changes in the global dollar index.
He also noted a potential inconsistency between the central bank’s stated commitment to a market-based exchange rate and its interventions during periods of fluctuation, suggesting that restricting forward transactions may limit normal market dynamics.
Arfan Ali, former managing director of Bank Asia, described forward booking as a legitimate and widely used risk management tool. He observed that, although foreign exchange transaction volumes in Bangladesh remain relatively modest compared with other economies, demand for hedging instruments has increased as businesses seek to manage risks associated with global uncertainty.
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