Forex market gets restive, exchange rate overshoots Tk 126

Bangladesh's foreign-exchange market becomes extremely volatile suddenly with the exchange rate against the greenback overshooting the peg to Tk 126, worrying officials, bankers and businesses.
The informal-market rate is far higher than the upper ceiling (Tk 120 a dollar) set in the central bank-introduced crawling-peg mechanism.
To stop the baroque buck-up, Bangladesh Bank (BB) launched inspections Tuesday to find out factors behind the forex-market unrest before taking remedial measures, officials said.
The sudden overheating of the foreign-exchange market "after five months of stability surprisingly comes at a time when the inflow of the US dollar continues rising", they said.
And the exchange rate against the US currency continued rising in such an acceleration over the last two weeks that becomes a matter of concern for the central bankers and money-market analysts.
Bankers have pinpointed several factors, including a recent circular from the central bank over clearing import overdue and panic purchase of dollars, contributing to such an abnormal rise in exchange rate within a short time.
The FE correspondent talked to a number of treasury heads of commercial banks to figure out what really went wrong all of a sudden but all of them agreed to share their thoughts on condition of anonymity.
One treasury head said the BB recently issued an instruction asking the banks to clear all the overdue import payments within this month to avert punitive regulatory actions and "it created panic" among the bankers dealing with forex.
After the order, he said, a good number of the banks intensified their efforts to source dollar at higher rates and build up the stock to avert any possible setback in the days ahead.
"The exchange rate was just over Tk 123 even weeks before. Now it hovers in-between Tk 126.50 and Tk 126.70 a dollar," the treasury official said.
As the volatility on the market continues taking in steam, he said, the wave of panic also spread among the entrepreneurs who are in desperation to make advance payment against their import orders, which adds fuel to the abrupt demand surge.
The treasury head of another commercial bank mentions that the central banks in other countries normally tackle any such abnormal disruptions to the forex market with direct intervention through selling the US dollar.
Once the market cools down, the central bank mops up the foreign currencies from the market through reverse instrument.
"Instead of doing so, our central bank, being afraid by a condition of the IMF, continues buying more dollars from the market to bolster forex reserves, which is creating further pressure on the market," he said.
According to BB statistics, the banking regulator purchased $47.5 million in November. But in the first 12 days of this month, the central bank bought $47 million from the market.
Seeking anonymity, a BB official said the volatility on the market of foreign currencies had been observed in recent days while the inflow of dollars keeps surging, which is "very surprising".
Sharing some data, the central banker said the country received $1.70 billion in remittance in just 17 days of this month, which is very encouraging. Simultaneously, the Asian Development Bank (ADB) has already approved a budget-supporting programme amounting to $600 million, which is expected to be added to the reserves within a day or two.
On the other hand, he said, another $500 million support will come from the World Bank (WB) while The OPEC Fund for International Development will release its funding equivalent to $100 million within this month.
Under such situation, he said, the market abnormality is unexpected. "We have already launched inspections to detect the wrongdoers," he added.
When contacted, chairman and founder of the Policy Exchange of Bangladesh Dr M Mashrur Reaz said the country had a comfortable state of forex market over the last five months through stemming the fall of the reserves.
"But," he says, "we have been observing an abrupt demand surge within a short period of time, which is surprising and unfortunate."
The economist feels that the regulator should carefully analyse the impact of demand-supply equilibrium and act accordingly. "At the same time, the central bank needs to do its best to bring back confidence on demand side to avoid panic dollar purchase."

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