The Bangladesh Bank has lowered the interest rate for banks to invest in stocks under its special fund for capital market investment, offering good news to the country's stock market that has been on a rising trend on the back of low interest rate.
From now, banks can borrow money from the central bank's special fund at 4.75% interest rate to invest in stocks, down by 25 basis points from the earlier 5%, according to a circular issued by the central bank on Thursday.
The new development came a day after the stock market saw the approval of the biggest ever initial public offering (IPO) in its history. Robi Axiata Ltd, the country's second-largest cellphone operator, has got the securities regulator's approval to collect Tk523.7 crore from investors through the IPO.
The Bangladesh Bank revised down the interest rate aligning it with the repo rate that has been cut in the latest monetary policy for the current fiscal year from 5.25% to 4.75%.
Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
There are scopes for reducing the interest rate for special funds below the repo rate, but the central bank did not do this as banks already are awash with excess liquidity, said a senior executive of the Bangladesh Bank.
He said the rate can be reduced further if needed.
In the case of repo, the rate will be variable – meaning the interest rate will go up with increasing tenure.
Surplus liquidity of the banking sector stood at Tk1.39 trillion as of June this year.
The low-cost fund will speed up bank investment in the stock market, said market insiders.
Shakil Rizvi, shareholder director of the Dhaka Stock Exchange, hailed the central bank's move to reduce the interest rate as a pro-capital market measure.
"The interest rate cut will make the central bank's special fund more lucrative. This will encourage banks to make more investment in the stock market borrowing money from the fund," he said.
Banks have already started to invest in stocks as they are now well-positioned with liquidity, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
Moreover, the entrance of big IPOs like that of Robi is a positive sign for the market. Therefore, the reduction in the interest rate will encourage banks to expedite investment, he said.
He, however, mentioned that there remain confidence issues. "Cheaper funds do not matter much. There should be a consistency of good policy measures and bringing good companies to retain bank investments in the market," he added.
Money always flows to the stock market when the interest rate remains low, said Md Arfan Ali, managing director of Bank Asia. Moreover, the money market has enough surplus money at this moment, he said.
The goal of lowering the interest rate is to adjust it with the market rate, said Rahel Ahmed, managing director of Prime bank.
He said it will make stock investment easier for banks but questions remain regarding the fundamentals of the market.
He emphasised listing more fundamentally strong companies to keep the market movement positive. "More big companies like Robi should come to the stock market," he added.
Under the special fund, banks have already invested Tk500 crore, according to the latest data from September, while they are committed to investing Tk1,700 crore.
Earlier in February, the Bangladesh Bank offered a special low-cost liquidity support package for stock investment, allowing banks to invest up to Tk200 crore each under the package.
Even though banks did not show much enthusiasm for this offer in the beginning, they expedited their investment in stocks under the special fund following the implementation of single-digit lending rate from April.
"The interest rate cut will make the central bank's special fund more lucrative. This will encourage banks to make more investment in the stock market borrowing money from the fund," says Shakil Rizvi
The total fresh stock investment under the package increased by almost four times after the market was reopened on May 31 amid the pandemic, compared to Tk130 crore in March, according to the central bank data.
The fresh flow of money into the stock market has already positively impacted price indices as the Bangladesh market became the best performer globally with the highest gains in indices in August.
The AFC Asia Frontier Fund found that most of its larger markets made good gains in August and the Bangladesh market made a gain of 15.8%.
Asia Frontier Capital Ltd, an investment company based in Hong Kong, manages various funds, namely AFC Asia Frontier Fund, AFC Iraq Fund, AFC Uzbekistan Fund, and AFC Vietnam Fund.
A research conducted by AFC Asia Frontier Fund released on August 8 showed that lower interest rate, increasing exports and remittances and the reopening of the economy have led to this rally in the Dhaka Stock Exchange (DSE).
An increase in banks' involvement in stocks has led to a positive movement of bank shares in the stock market.
From June to September, the price of bank shares gained 22%, leading the market indices to gain 38%, according to Dhaka Stock Exchange (DSE).
In Thursday's circular, the Bangladesh Bank also increased investment opportunities for banks in bonds. Banks now can invest in bonds having a profit rate below 10%, which was restricted in the previous circular.