Higher policy rate drags stocks down, DSE turnover at 1.5-month low

Infographic: TBS

The country's capital market, already sluggish due to the imposition of US visa restrictions, faced another blow on Thursday after the Bangladesh Bank raised the policy rate in an attempt to tame inflation. 

Although the equity indices of the Dhaka Stock Exchange (DSE) saw minimal change, market participation took a hit as the daily turnover fell by nearly 13% to Tk389.7 crore — lowest in one and a half months. 

DSEX, the benchmark index of the DSE, slipped a point to settle at 6,262, Shariah index DSES shed 0.25 points to hit 1,355, whereas blue-chip DS30 inched up 2.28 points to reach 2,137 on Thursday compared to the previous session. 

What changes a higher repo rate might bring

The Bangladesh Bank, on Wednesday, has increased its key policy rate, also known as the repo rate, by 75 basis points to 7.25%, which is the highest in the last decade. 

Repo rate is the rate at which a country's central bank lends money to commercial banks in the event of any shortfall of funds. 

With the recent hike in the repo rate, the borrowing costs for commercial banks from the Bangladesh Bank are set to rise, inevitably leading to an increase in the banks' lending rates. As anticipated, the central bank has already elevated the lending rate for banks to 10.7% as of Thrusday.

And, with the surge in the lending rate, the cost of money for consumers is set to increase, resulting in a decrease in credit demand and, ultimately, alleviating price pressure.

When banks borrow from the central bank at a higher rate, they are likely to set a higher rate for treasury bills linked with the lending rate. The policy rate hike will elevate the deposit rate as well. 

How all this might affect the capital market

Stock market analysts said the higher policy rate, not overnight but gradually, will slow down the money flow in the capital market. 

They said fresh funds are not being injected in the stock market as many stocks, even the fundamentally good ones, are lying at floor prices. Now, this sky-high policy rate will further decrease the market liquidity. 

In addition, the new policy rate will raise the interest rate on treasury bills and bonds, and deposits. This will result in banks investing in treasury bills and bonds as it would be the safer option. 

Also, an increase in the deposit rate would lead to a shift in money flow from the secondary market to banks as many investors are likely to invest in fixed income deposits rather than in the stock market. 

Market snippets

On the sectoral front, the food and allied sector contributed the highest 17.2% to the day's turnover, followed by general insurance adding 16%, and miscellaneous stocks adding 12.3%. 

Shyampur Sugar Mills was the top gainer with a 9.97% price appreciation to Tk155.4 each. On the other hand, Emerald Oil Industries was the top loser with a 7.1% price correction to Tk111.1 apiece on Thursday at the DSE.