A decline in interest rates usually prompts investors to move their money from the banks to the equity or share market, creating a sudden demand for stocks. On the other hand, when interest rates rise, funds flow out from the capital market to the banks for guaranteed return.
But it seems to be not in effect in Bangladesh as stock markets behave ignoring any such theory.
Take the case of the latest Bangladesh Bank's decision to cap lending rate at 9 percent from April 1. The BB on February 23 issued a circular limiting lending rates for all loans except credit card. Banks have already set the maximum ceiling for deposit interest at 6 percent from February 1.
Though the decision came as a big blow to banks that have huge loan exposure in small and medium enterprises and retail segment, it is supposed to be a blessing for the country's capital market.
Funds are supposed to flow in to the stock market from banks and postal savings for a significant rate cut on those instruments. That would be the normal investor behaviour in any economy.
But that was not the case for us.
Dhaka Stock Exchange (DSE) lost 290 points or 6.17 percent from its key index since the central issued the order to cap the lending rate exactly a week ago. Market valuation of all stocks listed on DSE fell over Tk 22,000 crore or 6.11 percent in a week.
The hardest jolt was felt by the banking sector.
The total market value of 30 banks listed on DSE was Tk51,808 crore on February 23. Just after five trading sessions, the figure came down to Tk47,834 crore, meaning that investors on bank stocks, many of which are being traded below their face value, lost nearly Tk4,000 crore.
The Business Standard has talked to a number of merchant bankers, commercial bankers and stock market stakeholders to understand the reasons behind the paradoxical behaviour of our stock market.
The central bank's announcement to cap lending rate at 9 percent came on top of the reasons, followed by sale pressure from foreigners, concern of currency devaluation and a looming impact of coronavirus on the economy.
Uncertainty over the use of Tk200 crore, which banks have been allowed to invest in stocks on relaxed conditions, is quizzically the other issue.
"Market has become a bit uncertain. Capping the lending rate has affected the market as investors think the decision will harm the bank's profits," said a senior merchant banker of a private bank.
Whether banks will invest Tk200 crore in the market is also not certain to investors, he said.
A deputy managing director of another private bank said capping the lending rate at 9 percent compelled many foreign investors to sell their stocks.
"Foreign investors sold around two crore shares of BRAC Bank last week as they thought the bank's earnings will go down significantly for the interest cap," he told The Business Standard.
Market value of BRAC Bank's two crores shares was Tk79 crore as of yesterday.
Rakibur Rahman, a director of DSE, also admitted that interest rate cap has affected investors' confidence. He is also aware about BRAC Bank's share sale by foreigners.
"It seems the market has become a place for traders. Nobody is investing for long term," he said.
Earlier on February 11, the BB in a circular allowed banks to create a special fund worth Tk 200 crores for five years to expand their exposure to the stock market. The banks can use their own funds or borrow from BB at 5 percent, instead of the existing
6 percent, for a 90-day period with a rollover extending to 5 years through repo or refinancing mechanism against treasury bills and bonds.
The banks can invest 40 percent of the fund directly to build their own portfolio, 20 percent to new portfolio of their subsidiaries, 30 percent to other bank or their subsidiaries and 10 percent to other merchant bank or brokerage houses. They also have the option to lend to share market intermediaries at 7 percent rate of interest.
"That was a great decision to bring banks into the market and help it grow," said a frustrated investor. He now realises that his assumption was wrong.
Even, an intelligent investor will not be sure about the movement of the DSE…only insiders and makers, be they individuals or institutional, make money by withdrawing their funds on time and 99 percent investors lose, he remarks.