Policy rate hike threatens to deepen market drought
Overall inflation has been above 9% since March 2023
The country's capital market, already grappling with a liquidity crisis brought on by subdued investor confidence, is under threat of a fresh blow from yesterday's hike in the policy rate, known as the repo rate.
The benchmark index DSEX of the Dhaka Stock Exchange closed 34 points lower at 5,690 on the day the Bangladesh Bank raised the key interest rate by 50 basis points to 8.5%, marking the third increase since October, aiming to curb inflation.
The blue-chip index DS30 also fell by 14 points to 2,026 while the turnover value at the country's premier bourse dropped by 22% to Tk869 crore, compared to the previous session.
The Chittagong Stock Exchange's all-share price index, CASPI, also plummeted by 83 points to settle at 16,313.
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According to the Bangladesh Bureau of Statistics, headline inflation in the country rose slightly to 9.81% in March, compared to 9.67% in February.
Overall inflation has been above 9% since March 2023.
In its daily market review, EBL Securities noted that investor sentiment has been influenced by the possibility of interest rate hikes in the money market, triggered by the recent policy rate increase and the discontinuation of the existing SMART reference rate.
Additionally, the further devaluation of the local currency is anticipated to impact the ongoing market recovery, it added.
Saiful Islam, president of the DSE Brokers Association of Bangladesh, told The Business Standard that the market is currently grappling with a liquidity crisis.
He expressed concern that the heightened policy rate would elevate the cost of funds, presenting a significant challenge for the stock market.
Additionally, with the reintroduction of the market-driven lending rate by the Bangladesh Bank, controlling interest rates becomes crucial, as failure to do so could significantly hinder liquidity support in the market, he added.
Moniruzzaman, managing director of Prime Bank Securities, expressed concern that the interest rate hike would negatively impact them.
He emphasised that the central bank's decision to raise the rate was aimed at tackling macroeconomic challenges and hinted that successfully overcoming these challenges would naturally result in a decrease in interest rates.
Currently, stock brokers and merchant banks obtain funds from both banks and non-bank financial institutions to invest in the market, subsequently lending them to clients as margin loans.
Pinpointing the precise volume of margin loans in the stock market proves challenging, with several officials from the DSE and the Bangladesh Securities and Exchange Commission (BSEC) estimating the figure to be around Tk15,000 crore.
Industry insiders reveal that the interest rate on margin loans ranges from 15% to 17%.
The current margin loan interest rate will be increased further, said Moniruzzaman.
Previously, amidst persistent downturns, the BSEC had implemented floor prices to mitigate steep declines in 2022. However, after more than two years, the regulator lifted these restrictions in January of this year. Subsequently, with the stock market experiencing further sharp declines, the BSEC reduced the lower circuit breaker limit last month, setting it at 3% instead of the previous 10%.
In 2021, the BSEC established 12% as the maximum interest rate permissible on margin loans, yet it proved unsuccessful in lowering the interest rate.
Investors have the option to borrow up to 100% of their equity from their broker or merchant bank, utilising this leverage to purchase additional listed securities; this borrowing mechanism is commonly referred to as a margin loan.
Stocks eligible for margin trading must adhere to specific criteria, including maintaining a maximum price-to-earnings ratio of 50 and holding A category status for three consecutive fiscal years, with a minimum paid-up capital of Tk50 crore.
