The State Bank of India (SBI) has instructed its branches to avoid taking significant foreign currency exposure to Bangladesh until further notice in light of a currency crisis there. This will effectively mean that domestic exporters and importers who have business ties to the country’s main lender will be discouraged from settling their trade with Bangladesh in dollars or other major world currencies. Exporters fear, however, that such a decision could negatively affect the immediate trade flow between the two countries.

In a recent circular, reviewed by FE, the country’s largest lender, however, said that “exposures to the rupee and taka will continue as before”. Bangladesh became India’s fourth largest export destination in FY22, with shipments exceeding $16 billion. The bank said Bangladesh “is facing a shortage of foreign currency due to rising import bills and the weakness of the Bangladeshi taka against the dollar in recent times.”

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“In view of the current economic situation and shortage of foreign currency, it has been decided by the competent authority not to assume the exposure to the US dollar / other foreign currencies of Bangladesh until further notice,” said he added. An email sent to SBI did not immediately receive a response. Bangladesh’s foreign exchange reserves began to dwindle after a spike in global commodity prices, particularly energy, widened its foreign exchange account deficit.

This forced Dhaka to contact the International Monetary Fund (IMF), among others, for help. It is reportedly seeking a $4.5 billion loan from the multilateral body, in addition to its $1 billion entitlement, under the IMF’s Resilience and Sustainability Fund. Industry sources said the major lender did not want to expose itself to new dollars on Bangladesh for fear of large-scale defaults by importers in that country, if the forex situation worsens.

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The SBI’s decision comes after the Reserve Bank of India notified the new international trade settlement mechanism in rupees in July, to reduce the depreciation of the rupee against the dollar. Earlier this month, Finance Minister Nirmala Sitharaman said many countries have now expressed interest in settling bilateral trade with India in rupees.