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The continuation of contractionary monetary policy for the second half of FY24 – announced as part of the new monetary policy statement (MPS) – may impede the anticipated bullish trend in the capital market amid a post-polls atmosphere, market insiders say.
The hike in interest rate – triggered by policy rate increase – could accelerate the liquidity crisis plaguing the stock market, as investors are likely to divert funds to fixed-income assets, they point out.
Bangladesh Bank Governor Abdur Rouf Talukder unveiled the new MPS last Wednesday. The central bank raised the policy interest rate yet again in the new monetary policy to bring down inflation to 7.5 per cent.
The regulator, however, remains unwilling to leave the interest rate entirely to the market.
The policy rate has been increased by 25 basis points to 8 per cent. Besides, the crawling peg system has been introduced to prevent volatility in the foreign exchange market. The regulator expects that the USD price can be gradually adjusted and stability will return to the market.
It points out that the stock market regulator Bangladesh Securities Exchange Commission (BSEC), in collaboration with Bangladesh Bank and other relevant government entities, has consistently spearheaded initiatives to foster a robust capital and bond market in the country.
EBL Securities, a leading stock broker in the country, said in its monetary policy review, “Interest rates are likely going to increase following the raising of the policy rate by 25 basis points, and the expectation of central bank intervention in the foreign currency market to keep the foreign exchange rate within the established band.
“This rise in interest rate is likely to benefit the listed banks and NBFIs’ profitability. Listed companies with significant investments in fixed deposit instruments will also continue to benefit from this high-interest rate environment.”
The review said the continuation of contractionary monetary policy may impede the anticipated bullish capital market trend post-election period.
"With the expected increase in the G-Sec’s coupon rates and financial institutions’ deposit rates, some funds from the equity market may get channeled towards less risky fixed-income instruments in the coming months,” EBL Securities said.
This will adversely impact market turnover and liquidity in the equity market. It said that listed companies with substantial leverage will also have to grapple with the challenges of higher financial expenses.
The review stated that the introduction of the crawling peg is expected to positively impact companies with significant exposure to foreign exchange risks, as this will communicate to the stakeholders beforehand the expected band of foreign currency rates, thereby reducing the uncertainty associated with the current exchange rate regime.
According to Md Moniruzzaman, managing director and chief executive officer of Prime Bank Securities, “A higher interest rate aimed at wiping up extra money from the economy will hamper the profitability of highly leveraged listed firms.
“On the other hand, it will go in favor of multinational companies and firms with high cash or cash equivalent assets.”
Saiful Islam, president of the DSE Brokers Association (DBA), said, “Interest rate hikes are always bad for the stock market because investors move to fixed deposit receipts (FDRs) for a safe return.
“Therefore, with the new monetary policy, the flow of funds into the stock market will be squeezed.”
Meanwhile, the rising interest rate will further discourage businesses from borrowing, and thereby reduce private sector credit growth, Green Delta Dragon Asset Management Company said in its review.
The government is taking austerity measures, and hence, public credit growth will also remain subdued. Hence, bank lending growth is expected to be in the low range, it added.
The Dhaka Stock Exchange (DSE) ended the first week of the national pools, which sparked a rally with the key index crossing the psychological threshold of the 6,300 mark after nearly four months.
Before the week of the election, Dhaka stocks ended on a flat note with lower market participation owing to shaky confidence regarding market momentum.
After the trading session [on Thursday], after unveiling of the new MPS on Wednesday, DSEX declined by 9.5 points and settled at 6,337 points as against 6,346 points in the previous trading session.
The indices observed volatility throughout the session as sellers dominated the market to realize their short-term gains, being wary of a probable shift in market momentum following the recent interest rate hikes in the central bank’s recent contractionary monetary policy stance, market insiders said.
