Real effective exchange rate (REER) in Bangladesh rose to a seven-month high of 103.10 by June count, up 0.67 per cent from 102.41 in May, with its domino effect on the country's external trade. Bangladesh market analysis
According to data released Thursday by Bangladesh Bank, the REER has been on an upward trajectory since March after falling to 101.43 in February. The increase coincided with the taka-dollar exchange rate having reached Tk 122.95 per US dollar in June.
The higher REER indicates that the local currency remained overvalued against the currencies of Bangladesh's major trading partners despite its gradual depreciation against the greenback.
The local currency weakened by around 0.11 per cent against the dollar in June compared to the previous month.
Market participants say the exchange rate would have been around Tk 126.65 per dollar in June had it fully reflected market fundamentals. Trade capacity planning
However, the central bank appears to have sought to avoid a sharper depreciation because of its potential impact on import costs and domestic inflation.
While many analysts believe a REER reading in the range of 100-103 does not warrant immediate concern, one central banker, requesting anonymity, has said the International Monetary Fund (IMF) may view the taka as still being overvalued.
"The IMF would probably prefer the REER to decline to around 95 to improve Bangladesh's export competitiveness. It has often argued that the central bank should allow greater exchange-rate flexibility rather than influencing the market," he said.
An exporter from the apparel sector said businesses had incurred exchange-rate losses during periods of sharp movements in the taka value.
Economists say an overvalued exchange rate has long been regarded as one of the factors affecting the competitiveness of Bangladesh's exports.
According to Bangladesh Bank data, the taka depreciated by 0.60 per cent against the US dollar at the end of FY2025-26 compared to the end of the previous fiscal year.
Experts attribute the rise in the REER largely to Bangladesh's persistently higher inflation relative to its major trading partners, where inflation has generally remained between 2.0 per cent and 3.0 per cent compared to around 9.0 per cent in Bangladesh.Bangladesh market analysis
"In my view, higher inflation is the principal reason behind the increase in the REER," said Dr Md. Ezazul Islam, Director-General of the Bangladesh Institute of Bank Management (BIBM).
He thinks Bangladesh would need either to bring inflation under control or allow the aka to depreciate further to restore external competitiveness.
The Bangladesh Bank calculates the REER using a 17-currency basket (base: FY2023-24 = 100), taking into account the country's trade and remittance flows.
jasimharoon@yahoo.com