De-dollarization: Bangladeshi banks to offer trade transactions in Indian rupees as reserves fall

Two Bangladeshi banks plan to launch trade transactions denominated in Indian rupees as the South Asian country seeks to increase its forex reserves and lessen its dependency on dollars.

Until now, Bangladesh has only carried out trade transactions in dollars.

On July 11, Eastern Bank, which opened rupee accounts with the State Bank of India and ICICI Bank, announced its plan for trading in rupee. Sonali Bank, a state-owned lender in Bangladesh, also offers the same service.

A nostro account refers to an account a bank holds abroad at another bank in the currency of that jurisdiction. Such accounts are used for international trade and to settle other foreign exchange transactions.

“This is just the beginning. More banks will join us in the coming days. It will ease pressure on the foreign reserves,” Afzal Karim, managing director of Sonali Bank, told Reuters.

The exchange rate mechanism will be decided on a cross-currency basis by individual banks and a formal announcement will be made on July 11, said Ali Reza Iftekhar, managing director of Eastern Bank.

“The use of the Indian Rupee in India-Bangladesh trade provides a convenient and cost-effective mechanism for conducting cross-border transactions, contributing to the strengthening of economic ties between the two nations,” Iftekhar said.

India is Bangladesh’s second-largest source of imports after China, with Dhaka’s exports to India standing at $2 billion in the year to June 2022 while Bangladesh’s imports from India were$13.69 billion.

Bangladesh is struggling to pay for imported fuel because of a dollar shortage. Its dollar reserves have shrunk by more than a third since Russia’s February 2022 invasion of Ukraine to stand at a seven-year low of $31.60 billion.

The value of Bangladesh’s taka currency fell by over a sixth during the 12 months through May.

With inputs from agencies.