Bangladesh and India agreed in January 2010 to provide for transit trade through Bangladesh to connect the north-eastern states with the rest of India. The decision raises serious questions of economics, politics and the subregional development strategy. For Bangladesh, the key question is no longer whether it should allow transit rights to Indian goods but what is in its best strategic interests. This can only be done after a suitable assessment of the economic and broader strategic issues. At the purely economic level, the most important questions relate to the (a) demand for transit; (b) most suitable modes of transport; (c) time and cost savings, and the benefit sharing between India and Bangladesh. At the strategic level, it is important to understand the deeper concerns of India, the north-eastern states and Bangladesh that have a bearing on the transit debate. There are a number of bilateral issues of national importance that remain unresolved, including watersharing, marine boundary demarcation and insecure borders. Bangladesh has to therefore evaluate its response to the Indian demand for transit based on both economic and strategic considerations. This study is an attempt to combine both kinds of perspectives in order to define Bangladesh's policy response in the wake of the 2010 agreement.