Currency devaluation has led to a steep selloff in foreign investment portfolios in the stock market as a weakening taka against dollar erodes foreign investors' profit.
The selloff of shares in foreign investment portfolios has put the stock market under pressure, keeping price indices downward.
The outflow of foreign investment from the stock market was Tk1,000 crore in the first four months of this year, while the inflow was only Tk300 crore, according to data of the Dhaka Stock Exchange (DSE). Last year, outflow of foreign investment was Tk5,000 crore, while inflow was Tk2,000 crore.
The Bangladesh Bank started devaluation in August last year to give the economy an advantage amid rising import expenditure and slowdown in remittance and export earnings.
Foreign investors started to sell shares from the beginning of the year to avoid loss from possible correction in the exchange rate amid globally rising dollar price following the Russia-Ukraine conflict.
In January last year, the inter-bank exchange rate was Tk84.80, meaning a foreign investor would get a dollar for each share sold at that price.
Now, an investor would get less than a dollar even if a share is sold at the same price as the inter-bank exchange rate has surged to Tk92.80 after continuous devaluation by the Bangladesh Bank in recent months.
This is how devaluation has been disadvantageous for foreign investors who now find themselves spending more to take back their sale proceeds after converting local currency into dollars.
The rate of return from shares has also been unable to offset the losses due to devaluation as price indices in the stock market have remained downward amid rising inflation and mounting nervousness in the global market, said market insiders.
The net portfolio investment turned to negative $269 million at the end of the fiscal year (FY)21 from positive $44 million in FY20, according to the Bangladesh Bank data.
The negative net position means outflow was higher than inflow.
Apart from devaluation, another factor discouraging foreign investors from holding shares in Bangladesh is the interest rate hike in the US market, said Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office.
He said foreign investors started to sell off shares from last year to avoid possible loss from devaluation. It is because the difference between rates of return was not higher than their expected depreciation loss.
There is a risk of currency devaluation further as the country's trade deficit is widening, so foreign investment is expected to remain slow in the coming days, he said.
The rate hike makes US treasury bonds more profitable for foreign investors and there is a possibility of further increase of the interest rate to tame inflation. As a result, investing in US treasury bonds is more profitable for them than investing in emerging markets, he added.
The US Federal Reserve raised its main interest rate by 75 basis points recently – the biggest increase since 1994 – to a range of 1.5%-1.75% to tame inflation.
As American inflation had hit 8.6%, a 40-year high, the US Federal Reserve went for a massive hike, the third since March, in the key interest rate and with hints of further increases in coming months.
Ahsanur Rahman, chief executive of BRAC Stock Brokerage, the top brokerage in managing foreign investment, said Bangladesh stock market was no longer attractive to foreign investors due to multiple factors, including devaluation and the US rate hike.
Moreover, many foreign funds from frontier markets closed during the pandemic, which also impacted foreign investment inflow, he said.
Ahsanur said foreign investors took safe positions to observe the exchange rate market and they may not be active until the rate is stable.
The exchange rate, which had remained stable between Tk84-Tk85 for several years due to central bank intervention, crossed Tk90 in June for the first time in the country's history, with the latest rate at Tk92.80.
In the last one-and-half-years, taka weakened by 9.4% against the dollar.
Currently, insiders feel the widening trade deficit and dollar crisis in the market signal further devaluation of the dollar.
The country's trade deficit reached a historic high of $27.56 billion in the first 10 months of the current fiscal year, the central bank data shows.
In the budget speech proposed for the next fiscal year, finance minister AHM Mustafa Kamal said the exchange rate of taka against the US dollar will be kept competitive, which, many believe, means hints at further devaluation.
He also said keeping foreign exchange reserves stable would be a great challenge for the government amid price volatility in the international market.
He, however, emphasised the need of foreign investment to support growth.
"The government has also been organising and sponsoring seminars and workshops, roadshows, and trade shows in and out of the country. All these arrangements are meant to identify potential investors, highlight the existing investment opportunities to them, attract them to invest, and expedite the elimination of investment-related roadblocks," he said.
Though the Bangladesh Securities and Exchange Commission held multiple road shows in different countries to attract foreign investment in the stock market, its impact was not reflected in the foreign investment portfolio.
Price indices movement in the stock market
The Dhaka Stock Exchange broad index declined by 16% in a span of eight months from October last year to May this year. The DSEX hit 7300 in October last year, the highest in the last one year but it did not last long due to fast devaluation of taka amid a serious dollar crisis in the market which put pressure on the stock market and dragged the price index to 6100 in May this year, according to the DSE.
The daily turnover also saw a sharp decline to an average of Tk600 crore from Tk1800 crore during the same period.
Neighbouring India also experienced the sell pressure in the stock market as a consequence of currency devaluation.
Indian stocks tumbled after the rupee hit a record low of Rs78.28 per dollar in June.
Benchmark indices Nifty and Sensex plunged by 2.64% and 2.68%, respectively, on the day the Indian currency breached Rs78 to a dollar, the sharpest drop since early March, according to Indian media reports.