Monetary policy likely to give stock market a boost

The monetary policy for the first half of the fiscal year 2023–24 is likely not to invigorate the country’s capital market directly, but it will facilitate the listed financial and manufacturing-sector companies, experts and analysts say.

As the financial and manufacturing sector companies account for a large portion of the country’s listed securities, the stock market will indirectly get a boost through the new monetary policy.

As per the monetary policy announced for H1 of FY24, banks and non-bank financial institutions (NBFIs) are expected to increase their interest rate spread, leading to their higher profitability, due to the withdrawal of the lending rate cap and the introduction of a market-driven reference lending rate.

As a result, according to an analysis on the new monetary policy carried by EBL Securities, the listed manufacturing companies that are highly leveraged might face a decreased profitability mainly because of higher interest expenses.

Manufacturing companies with higher fixed deposit receipts (FDR) at banks and NBFIs, however, might receive higher net interest incomes, impacting positively their profitability.

Unveiling a contractionary monetary policy for the next six months, central bank Governor Abdur Rouf Talukder projected a 15.3 per cent domestic credit growth ceiling in FY24—accommodating the 11 per cent credit growth in the private sector and 30 per cent in the public sector.

Moreover, the government can finance a significant slice of its budget deficit from the bond market at a lower cost, though the capital market, particularly the bond market, is not well developed yet, the cenbank’s monetary policy statement said.

The central bank also intended to remove the lending rate cap and introduced a market-driven reference lending rate termed as the ‘SMART’ (Six-month Moving Average Rate of Treasury Bill), with a margin applied for banks and NBFIs.

Another leading stock broker, LankaBangla Securities, in its monetary policy analysis, said other policy effects, such as lifting the interest rate ceiling, might not benefit the equity market growth. The intrinsic strength of companies would be essential in making sound investment decisions.

The Bangladesh Bank in its new monetary policy has allowed banks to maintain a general provision of 1 per cent instead of the existing 2 per cent against classified loans from brokerage houses, merchant banks, and stock dealers.

The banking regulator has also issued a directive allowing all banks and financial institutions to facilitate trading sukuk bonds in the secondary market, which is now active.

This measure is to enhance flexibility within the banking sector for investing in the capital market, with the goal of promoting stability within the capital market, stock market analysts said.

A well-developed capital market is a must for ensuring long-term investment and the country’s economic development. But public and private investments in Bangladesh largely depend on bank financing due to the absence of a well-steamed capital market, the central bank’s policy statement read.

“The banks usually rely on short-term deposits for long-term financing, creating a maturity mismatch in the financial system and putting pressure on liquidity management. A strong capital market, especially the bond market, can meet the huge financing requirements for infrastructure development and industrialization, and contribute to the banking system’s stability.”

Besides, investors can reduce business costs and improve operational efficiency by borrowing from the bond market at competitive rates, the central bank’s monetary policy statement read.

Ahsan H Mansur, executive director at the Policy Research Institute (PRI), said the bond market would not revive unless policy-level changes were brought in. The government’s tendency to borrow money at lower interest rates is one of the obstacles to the development of the bond market.

Both the supply and demand sides must be strong for a vibrant bond market. More long-term Treasury bills will needs to be issued along with strengthening the demand side for them, he added.

On the bond issue, EBL Securities said the central bank has acknowledged the role of the capital market for the long term economic development, and underscored the need for the development of the bond market.

Listed companies that are highly reliant on imported raw materials might face an increase in production costs due to a higher exchange rate. However, listed companies that generate revenue from exports might positively be impacted due to the higher conversion rate of foreign currency, the stock broker said.

Dhaka Stock Exchange (DSE) chairman Dr Hafiz Muhammad Hasan Babu welcomed the new monetary policy, saying the central bank’s fresh policy supports are expected to become a pivot for the expansion of the country’s capital market as well as the overall economic development.

The announced monetary policy has emphasized ensuring long-term financing from the capital market. Besides, emphasis has been laid on establishing an effective bond market, the DSE chairman said.