Weak Rupee,Strong Yuan And Bangladesh

Bangladesh faces opportunities and challenges When two currencies see major changes.

Opposing trends in the currencies of Bangladesh's two largest trading partners have implications for Bangladesh. In one year, Chinese Yuan appreciated around 5% against the US Dollar(USD) while Indian Rupee depreciated around 10% against USD. China and India are Bangladesh's biggest import sources. In 2024-25,Bangladesh imported $18.19 billion worth of goods from China. Meanwhile,Bangladesh imported $9.69 billion worth of goods from India in the given period. Bangladesh's export to China and India during this time were less than $1 billion and $1.57 billion respectively. Bangladesh faces a combined trade deficit of around $25 billion with the two countries. So exchange rate changes of Yuan and Rupee inevitably influence Bangladesh economy.

Rupee's sharp depreciation was more pronounced in the first six months of this year in the wake of war in the Middle East. Oil price increase raised significantly the import bills,increasing demand for dollar. Inflationary pressure lowered purchasing power of Rupee and made other currencies more attractive. Current account deficit and foreign investors' withdrawal of money from Indian market in a bid to invest in dollar-denominated assets led to large depreciation of Rupee. Fed's decision to not lower the policy rate and uncertainty stemming from war in the Middle East strengthened USD against other currencies (see "Why Is Indian Rupee Falling Against The US Dollar?",Bajaj Finance Limited,June 06,2026,https://www.bajajfinserv.in/usd-vs-inr-why-indian-rupee-falling-against-us-dollar).

Yuan's appreciation is attributed to China's huge external trade surplus, export competitiveness and internationalization of Yuan. Moreover, Chinese capital market is closed and investors cannot invest abroad on foreign stocks in times of uncertainty. So extra wealth generated in the economy gets invested into Yuan-denominated assets.China's diversified energy mix also played a role in the appreciation of Yuan. Recent trade understanding between China and the USA also made the Yuan stronger(see "Global Banks Raise Yuan Forecasts, Fuelled By China's Export Strength And Stable Us Ties", Reuters, May 18,2026,https://www.reuters.com/business/finance/global-banks-raise-yuan-forecasts-fuelled-by-chinas-export-strength-stable-us-2026-05-18/l).

Rupee's 10% depreciation poses serious risks to Bangladesh's RMG export. India's recent final talk on FTA with Britain further amplifies the risk. Depreciated Rupee plus FTA have the potentials to wipe out the Bangladeshi RMG items from British market. Furthermore, competitiveness gained through this unprecedented depreciation makes India an attractive destination for relocating manufacturing centers from China,where rising cost and trade restrictions on Chinese goods make relocation of some manufacturing units inevitable. Indian economy can absorb the transitory effect from 10% depreciation. So such depreciation poses real challenges to Bangladeshi export sector, where persistent high inflation keeps the policy rate high and shrinks subsidy.

Appreciation of Yuan brings opportunities as well as challenges. As Chinese RMG items become less competitive, some orders may shift to Bangladesh. In addition, as imported goods become cheaper in China, Bangladesh's RMG export to the country may rise. There is a growing pressure from Bangladesh to narrow the trade balance, which is tilted in favor of China. The pressure plus the strong Yuan will play a conducive role to increase Bangladesh's export to China. Meanwhile, strong USD and Yuan pose challenges too. Bangladesh has long been mulling financing the public and private projects in Yuan as USD credit becomes more costly. Strong Yuan also makes Yuan credit costly. Chinese foreign investment also faces some obstacles as Yuan credit relatively gets costlier than before. Moreover, investment bankers think that People's Bank of China may raise the required reserve ratio for foreign currency deposit accounts, curtailing dollar liquidity into Chinese market(see "Chinese Yuan Rises To Highest Level Against Basket Since 2022",Jacob Gu,Bloomberg News, June 01,2026,https://financialpost.com/pmn/business-pmn/chinas-yuan-rises-to-highest-level-against-basket-since-2022l). This may put an obstacle to Chinese investors planning to implement their investment projects abroad in USD. Only time will tell whether opportunities outweigh the challenges or vice versa.

Bangladesh can ill afford further shrinking of its export income. Already inflation in advanced economies plus tariff debate made a dent into our export earnings. Depreciation of Rupee and appreciation of Yuan bring serious issues to competitiveness, export market and foreign financing of local projects. Country is experiencing serious inflation so further depreciation of Taka is not plausible right now. Contingency plans need to be chalked out so that risks from behavior of two currencies do not make inroads into export earnings.

Macroeconomy Amid Trade War

Clashes of the titans in trade May prolong the struggling state.

Bangladesh Bureau of Statistics (BBS) divulged that inflation again increased to 9.87% in May. It is highly likely to see another round of hike in policy rate in the next monetary policy statement. A 1% increase will make the policy rate 9.5%,narrowing the gap between current inflation rate and policy rate. Fitch ratings downgrade of Bangladesh's credit rating will make foreign credit harder for the public and private sector. Bangladesh Finance Minister is optimistic about getting the third instalment of IMF credit package. IMF in its last board meeting in May cleared credit package for Ecuador.

Things turn out to be difficult for the government. Revenue shortfall,dependence on domestic borrowing from banks,lack of foreign credit and FDI will cause further depreciation of taka against US dollar. Central bank's stated policy of containing the inflation rate to 7.5% may be prolonged and face serious hurdle in the wake of trade war between China and USA.

So far US federal fund rate is being stuck at 5.33%. Federal Reserve System has no intention to lower it as it sees inflation will take time to ease. Moreover, lowering the interest rate will raise the US treasury bond price,facilitating the process of ditching US treasury assets by govts not happy with US policies. Meanwhile Chinese policy rate is now 3.45% and it may go down further. It will make Chinese goods even cheaper. Let's draw a rough sketch on how the macroeconomic situation will prevail in the country given different policy rates in USA and China and trade tensions between the two countries.

Fed funds rate:5.33%
Chinese policy rate: 3.45%
If the current policy rates prevail and the countries engage in tariff and trade war, then Bangladesh has to further depreciate the currency since value addition condition to US-bound goods will also get tougher. However, special treatment to US cotton made garments may give some favor. But to meet the extra cost emanating from trade restrictions, Bangladesh has to depreciate its currency further to give the exporters some kind of favor. On the other hand, Bangladesh has to continue its contractionary policy for a longer period to mitigate the inflationary pressure.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
It will be hard to get foreign credit and assistance in US dollar. Dollar-based investment and return will be lucrative in the West and few will be reluctant to invest here where timely repatriation of profit is under scanner. Meanwhile, Chinese credit will be cheaper. Both the government and private sector will hinge on Chinese Yuan,easing the pressure on US dollar. Weakening of Yuan may increase Chinese share of EU export market, putting pressure on Bangladesh's export to EU. EU will unlikely to get tougher on China in the wake of a trade war in a bid to neutralize it against Russia. In this situation, taka has to be depreciated more than the previous scenario against the stronger US dollar and to stall the dollar flight. Amid tight monetary policy, the central bank may resort to money supplying measures,further worsening the inflation. More rise in policy rate and delay in stabilizing the macroeconomy. More reliance on Chinese credit and deepening trade ties between China and Bangladesh.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
It will help Bangladesh getting foreign credit in US dollar. Less pressure on forex reserve and taka. Ongoing monetary policy may go as usual and goals may be attained in the anticipated time. No large depreciation of taka is needed to make the goods more competitive. Easing of import restrictions on capital machinery may increase economic activity. Cheaper foreign goods/ingredients may ease inflationary pressure. Economic recovery will be early. This is an ideal case for Bangladesh as both the Yuan and US dollar credit will be available at an affordable rate in the wake of a trade war. Bangladesh may have to convert a significant amount of its US dollar assets into other IMF SDR currency or to procure gold if there is further unease in the relations between Bangladesh and USA.

Since access to foreign credit gets tougher for Bangladesh, Bangladesh has to prolong its austerity measures. In all three cases ,we see that Bangladesh has to continue raising policy rate and depreciating its currency. Likelihood of the occurrences of the cases would further depict a grimmer picture . Most optimistic scenario/case(the last one) for Bangladesh is less likely to happen. In a heated trade war,US will not lower the policy rate. The second one (worst for Bangladesh) will have a better chance to emerge than the first one. We have to further tighten our belt.