Forward rate agreements to stabilise import costs

The Bangladesh Bank recently issued a circular allowing the Authorised Dealers (ADs) to offer Forward Rate Agreements (FRAs) to importers as an interest rate hedging mechanism. Under this circular, clients can lock in an interest rate to protect themselves against future fluctuations in the Secured Overnight Financing Rate (SOFR) or currency values, enabling them to settle their loans as per the agreed-upon rate. This hedging facility is exclusively eligible for borrowers utilising buyers' or suppliers' credit.

As per the guidelines, no principal amount will be adjusted or exchanged under the FRA; only the net interest difference will be settled. Furthermore, the agreement applies strictly to floating-rate liabilities. To manage their own exposure, AD banks are permitted to execute back-to-back counter-hedges. By mitigating losses incurred due to SOFR volatility, this tool will help importers stabilise their overall import costs. To manage systemic risk, an AD bank's maximum FRA limit is capped at 25 per cent of its average monthly foreign exchange inflows.

The FRA is designed strictly as a hedging tool to insulate importers from the adverse impacts of rising interest rates, rather than a speculative instrument for generating profit. By introducing this facility, the Bangladesh Bank places the local financial market on a stronger trajectory towards developing interest rate derivatives. Furthermore, it marks a significant step forward, enabling Bangladesh to align with conventional, internationally recognised risk-management strategies.

Kawsik Azad Pronoy

A banker and economic analyst

kawsikdbbl@gmail.com