Taka remains undervalued for 2 consecutive months: BB Study

The Bangladeshi Taka (BDT) remained undervalued for two consecutive months, a recent study by Bangladesh Bank (BB) shows, indicating that depreciation pressures on the currency have reversed.

The report found that the equilibrium exchange rate, based on Real Effective Exchange Rate (REER) calculations, stood at Tk 121.55 in June 2025, leaving the taka undervalued by Tk 1.71 against the US dollar.

The study, estimating equilibrium exchange rates for Bangladesh, was prepared by Deputy Governor Dr Md Habibur Rahman, Chief Economist's Unit Director Dr Md Salim Al Mamun, Joint Director Mr Nur-E-Alom Siddique, and a PhD candidate at Deakin University, Australia.

According to the report, the Taka had been overvalued in past years: by Tk 9.09 in June 2021, Tk 8.11 in June 2022, and Tk 0.22 in June 2023. By June 2024, the currency turned slightly undervalued by Tk 1.11. Recent declines in the REER index were driven by currency depreciation and falling relative prices.

The study highlighted that exchange rate imbalances can create pressure on foreign exchange reserves and intensify depreciation risks. While the Taka experienced sharp depreciation pressure in 2023, the rate of depreciation eased in the second half of 2024, as authorities implemented a series of policy measures aimed at strengthening external sector stability.

"These measures have begun to deliver encouraging results: the exchange rate is exhibiting signs of stabilisation, and foreign reserves are showing early signs of recovery," the report said.

It added that this progress reflects improved balance-of-payments management, gradual easing of external pressures, and renewed market confidence. Understanding the equilibrium exchange rate remains crucial for assessing external sector sustainability, competitiveness, and macroeconomic stability.

Following the introduction of a fully market-based exchange rate system in May 2025, depreciation pressures largely subsided by the end of June 2025. The Taka's stability against the US dollar and reduced misalignment from its equilibrium level reflect the effectiveness of the new system.

The report also noted that recent directives did not distort the exchange rate market but supported prudent policy implementation by the central bank.

The study concluded that while there is no universal method for calculating equilibrium exchange rates, it used widely accepted REER and BEER indices to estimate exchange rate misalignment.

This approach provides a benchmark for policymakers and analysts to monitor currency stability and guide external sector policy.

jasimharoon@yahoo.com