Two Bangladeshi banks introduce Indian rupee trade transactions to bolster foreign reserves

Two major banks in Bangladesh, including the largest state-owned lender, are planning to introduce trade transactions denominated in Indian rupees, announced officials on Friday. This move comes as Bangladesh aims to strengthen its declining foreign exchange reserves.

Traditionally, trade transactions in Bangladesh have been conducted exclusively in US dollars. However, Reuters reports that state-owned Sonali Bank and Eastern Bank have recently opened "nostro" accounts in rupees with India's State Bank of India and ICICI Bank, respectively.

Nostro bank accounts

The establishment of these nostro accounts will allow the banks to hold funds in rupees abroad and facilitate international trade and foreign exchange transactions, reports Reuters.

According to Afzal Karim, the managing director of Sonali Bank, "This is just the beginning. More banks will join us in the coming days."

The introduction of Indian rupee trade transactions is anticipated to alleviate pressure on Bangladesh's foreign reserves, he added.

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"It will ease pressure on the foreign reserves."

The exchange rate mechanism for these transactions will be determined on a cross-currency basis by individual banks, with a formal announcement scheduled for July 11, according to Ali Reza Iftekhar, the managing director of Eastern Bank.

Why did Bangladesh introduce transactions in Indian Rupee

Talking to Reuters, Iftekhar said that by incorporating the Indian Rupee in trade with India, Bangladesh aims to establish a convenient and cost-effective mechanism for cross-border transactions.

"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," he said.

Bilateral relationship and Bangladesh's financial troubles

India stands as Bangladesh's second-largest import source after China. In the year leading up to June 2022, Bangladesh's exports to India amounted to $2 billion, while imports from India reached $13.69 billion.

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Bangladesh has been facing challenges in paying for imported fuel due to a shortage of US dollars. Its dollar reserves have also seen a decline of over a third since Russia's invasion of Ukraine in February 2022, reaching a seven-year low of $31.60 billion.

The devaluation of Bangladesh's currency, the 'Taka', by more than a sixth in the past 12 months through May further adds to the country's economic struggles.

(With inputs from agencies)

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