Banks still shy away from spot market forex trade

Commercial banks still go slow in trading foreign exchange (forex) in the interbank spot market even during the current free-floating regime, which is increasing their net open position (NOP) significantly.

Complying with a condition of the International Monetary Fund (IMF) given as part of its $4.70 billion lending package, the Bangladesh Bank left the exchange rate on the market with an undisclosed band on May 14 this year, hoping this will make the interbank forex spot market vibrant.

Since then, the volume of forex trade in the spot market has risen a little but is still far below the expected level.

According to the central bank statistics, banks altogether traded some $123.20 million in the interbank market in the last six days till Wednesday, with the daily average volume standing at $20.53 million.

Bankers said banks that built a good forex stock riding on steady export earnings and growing remittance inflow are still observing the market amid the regulator's supervision.

They said liquidity pressure at some of the banks intensified in recent days because of the upcoming Eid-ul-Azha, which forced them to sell foreign currencies to meet local payment obligations.

This largely contributed to the slim rise in the volume of spot market trade, they added.

Seeking anonymity, a central bank official said forex trade in the interbank spot market is picking up slowly, which is a good sign.

"Yes, the increase is far below the expectation, but it will take time as many banks have not participated in the spot market trading yet," he said.

Because of that, the NOP or forex stock at banks is rising fast, he added.

According to the central bank data, the NOP went up significantly in recent days to cross $700 million on Tuesday from $574 million recorded on May 14.

The NOP represents the difference between a bank's forex assets and liabilities. It reflects the bank's risk exposure to currency movements.

According to the Bangladesh Bank, the ceiling of forex that a bank can hold is between $2.0 million and $90 million, depending on its cross-border trade.

Managing Director and Chief Executive Officer of Mutual Trust Bank Syed Mahbubur Rahman said interbank forex trade has started gathering steam, which is a good sign. "I think it would accelerate further in the coming days as the exchange rate starts moving."

Seeking anonymity, the treasury head of a commercial bank said they purchased the US dollar at a rate of Tk 122.90 on Wednesday and the central bank officials concerned asked them too many questions about that.

"This probably creates fear among many bankers, prompting them to skip forex deals," he said.

The senior banker said the daily average interbank forex trade is $20.53 million, which is less than the NOP. "Is it justified?"

A few banks having very low remittance inflow sold the American greenback this week, he said.

"This is because they need local currency to meet the Eid demand, while some banks make gentlemen's agreements with others with a promise of return in a few days."

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