Stocks had the highest gains on Sunday in seven years on the hopes that the government would infuse funds – the news of which came in the evening when the Bangladesh Bank said it will give "policy and liquidity" support to the market.
The stock market, mired in the grip of the bear, had been witnessing spectacular losses for the last 11 months – wiping out over Tk100,000 crore in market capitalisation. But on Sunday, it suddenly jumped by a big 232 points or 5.6 percent in anticipation of policy and liquidity support.
Sources said the support may include long-term low cost funds for the institutional investors. Right now, the Bangladesh Bank is providing funds at 6 percent interest rate for six months to commercial banks for investing in stocks only.
But the response has so far been meek as banks are scared of the bearish market and are shying away in fear of losses.
"We will come up with a comprehensive and sustainable policy framework for supporting the stock market," Bangladesh Bank Executive Director Md Serajul Islam told newsmen after the central bank met with officials of merchant banks Sunday, after a discussion of the crisis by the Prime Minister's Office earlier on Thursday.
Currently, banks have exposure to the capital market up to 12 percent of their risk weighted asset against their limit of 25 percent. The Bangladesh Bank officials expect this exposure would go up with a lax policy.
Md Sayadur Rahman, president of the Bangladesh Merchant Bankers' Association, said they had a meeting with the Bangladesh Bank on Sunday and the central bank had been "positive and much cordial" about supporting the market.
Merchant banks have asked for a Tk10,000 crore support fund at 3 percent interest rate for six years.
"Bangladesh Bank Governor Fazle Kabir assured us of writing positive recommendations to the finance ministry about the soft loan scheme to be disbursed among interested stock dealers, merchant bankers and asset managers," he added.
They also requested the central bank to exclude capital market investments, made from the fund, out of calculation of the market exposure of banks and non-bank financial institutions to help the market in a sustainable manner.
The state-owned banks have already been intervening in the market for the last three days, buying shares at a limited scale, that has helped keep the index hold steady.
Increased participation also helped the market turnover at the premier bourse to cross Tk411 crore on the opening day of this week, which was Tk267 crore in the previous session.
The liquidity-driven rally debate
Since, the market crash of 2010-11, the government had come up with several support funds like the Bangladesh Fund of Tk2,000 crore and a refinancing scheme of Tk900 crore to support affected small investors.
But nothing worked to help the market recover in a sustainable way and the indices still sunk below half the level of the market peak of 2010.
Later, the Investment Corporation of Bangladesh (ICB) – the states investment arm – was provided with special bond funding of over Tk1,500 crore. Additionally, almost Tk800 crore was handed over to ICB for market support last year.
Each of the efforts resulted in a pause in the market falls or rallies that did not sustain. The worst thing was, after the rallies had expired, the market broke down below the previous low levels.
For long, experts have been blaming structural problems in capital market and a lack of governance behind the failure that pushed hundreds of thousands of individuals and hundreds of institutions to financial weakness even after a decade of the market crash.
Liquidity is a must, but investors' confidence is more important for a sustainable market recovery. The second one has been eroding due to act of many – both capital market entities and other agencies.
"Liquidity may help a temporary rally at best if the fundamental problems remain unresolved," said Dr AB Mirza Azizul Islam.
The finance advisor to the former caretaker government believes the banking sector is the biggest problem of the economy and it needs to be addressed with top priority.
"Investment confidence-killing issues like the ongoing tassel between Grameenphone and the telecom regulator needs to be resolved to assure investors," he further said.
Capital market itself is suffering from poor listing and well performing companies owned by the government and the Multinational headquarters should be on board, said the former chairman of the securities regulator.
Khondkar Ibrahim Khaled, former deputy governor of the Bangladesh Bank and the head of capital market inquiry committee formed after the 2010 crash, told The Business Standard last week that the stock market's biggest problem is within its leadership and the regulator.
"To revive investors' confidence, the government should replace them with skilled, bold and honest professionals," he suggested.
He hardly believes that the sought support scheme will work to help the market.
"The market intermediaries might rather end up embezzling the funds at the end," Khaled feared.
Md Sayedur Rahman, leader of the investment bankers, argued against this fear and said "it is too unexpected from a wise and respected person like him," adding, "Market intermediaries are legal entities and are seeking the fund as loans, which must be paid back, regardless of the market recovering or not."
However, they are meeting the finance ministry committee on capital market on Monday, where issues other than the liquidity crisis in the capital market will also be discussed, Sayedur added.