Stocks unnerved following tightened monetary policy

Stocks plunged on Thursday as the Bangladesh Bank continued tightening monetary policy in an effort to combat inflation, and the prospect of higher interest rates and reduced liquidity sent the market lower.

During the first trading session after the announcement of the contractionary policy for the second half of the current fiscal year, the benchmark index of the Dhaka Stock Exchange (DSE) fell by 9 points to settle at 6,336, and turnover dropped by 16% to Tk637 crore.

Market insiders expect the new supply will have an adverse impact on capital market turnover and liquidity as funds become more expensive. In addition, listed firms with substantial leverage will also have to grapple with the challenges of higher financial expenses.

Ashequr Rahman, managing director of Midway Securities, told The Business Standard, "Due to the new policy, some funds will flow out of the capital market, which is already experiencing a liquidity crunch."

"Fund flow in the capital market is very dry now. Investors are tight-fisted due to the floor price," he added.

Saiful Islam, president of the DSE Brokers Association, said when the policy rate is increased, funds typically flow out of the stock market.

"Interest rate hikes are always bad for the stock market because investors move to fixed deposit receipts (FDRs) for a safe return. Therefore, with the new monetary policy, the flow of funds into the stock market will be squeezed," he told TBS.

He said the market downward trend is not solely attributed to the new monetary policy; it may also be a result of a correction, considering the market had been on an upward trajectory for six consecutive sessions.

In its monetary policy review, EBL Securities said the continuation of contractionary monetary policy may impede the anticipated bullish capital market trend in the post-election period.

"Interest rates are likely going to increase following the raising of the policy rate by 25 basis points and the expectation of the central bank's intervention in the foreign currency market to keep the foreign exchange rate within the established band," it added.

The review said this rise in interest rate is likely to benefit the profitability of the listed banks and non-bank financial institutions. Listed companies with significant investments in fixed deposit instruments will also continue to benefit from this high interest rate environment.

"With the expected increase in the G-Sec's coupon rates and financial institutions' deposit rates, some funds from the equity market may get channelled towards less risky fixed income instruments in the coming months," it further reviewed.

Although stock trading on Thursday started on a positive note, it finally ended in red territory owing to selling pressure.

In its daily market commentary, EBL Securities said the DSE's benchmark index failed to extend its upbeat vibe as cautious investors engaged in profit booking following consecutive sessions of buy dominance across the trading board.

"The indices observed volatility throughout the session as sellers dominated the market to realise their short-term gains, being wary of a probable shift in market momentum following the recent interest rate hikes in the central bank's recent contractionary monetary policy stance," it added.

Moreover, investors' appetite for taking long-term positions in equities is still subdued, as cautious investors preferred to assess the sustainability of the current upbeat vibe in the market, the report said.

Ashequr Rahman said there is minimal impact as the market is bearish, adding, "The market was bullish for a few days, so profit-taking may also contribute to the market going lower."

The Shariah Index and blue-chip index of the Dhaka bourse also fell by 2 points and 9 points, settling at 1,388 and 2,129, respectively.
Out of the traded stocks, 56 advanced, 111 declined, and 172 remained unchanged.

BD Thai Foods topped the list with a gain of 9.19% to Tk29.7 each, followed by Gemini Sea Foods with an 8.54% increase to Tk348.2 each, and Orion Infusion with a 7.67% gain, reaching Tk469.8 each.

On the losing side, Sea Pearl Beach Resorts and Spa led the list, with its share price falling by 6.75% to Tk114.6 each, followed by Information Services, which saw a 4.65% decline to Tk57.3 each, and Shyampur Sugar Mills, where the share price fell by 4.54% to Tk214.2 each.