Stocks slip amid investors' cautious response to new monetary policy

Infographic: TBS

The central bank's latest monetary policy statement (MPS), with a higher inflation target and an upward push in policy interest rate, has apparently made stock market investors more cautious Monday (16 January).

The first morning after the MPS was announced by the Bangladesh Bank on Sunday afternoon for the January-June period started with some profit-booking pressure in the stock market that continued through seesaw price movements till the end of the session.

However, as none of the central bank stances were unpredictable and stock investors had already been prepared, the market also had enough buyers to absorb all the supply from the profit-booking investors, said stockbrokers.

Stocks on Sunday had their best day in a month as many investors chased the upward momentum in a number of selective scrips.  

Following the sharp 0.57% gains on Sunday, DSEX – the broad-based index of the Dhaka Stock Exchange (DSE) – closed 0.07% lower at 6,246.07 on Monday.

Meanwhile, the blue-chip index DS30 had a bigger – 0.3% – fall. In contrast to the previous session, 61 scrips advanced on Monday while 116 declined.

"The equity indices of the Dhaka bourse observed mild correction as the market pulse shifts to correction mode due to profit-booking activities from cautious investors following a sparked rally in the previous session owing to economic recovery signals," EBL Securities wrote in its daily market commentary on Monday.

"The market witnessed some volatility, with sellers dominating the trading floor as investors perceived every bounce back as an opportunity to book quick profits and take a cautious stance amid the dismal performance forecasts of the listed companies," it added.

The number of scrips having spontaneous bidders till the closing bell declined to 117, down from 134 on Sunday.

Thanks to the investors' increased activity on both sides of the fences, DSE turnover inched up to Tk714 crore.

The MPS boosted investors' hope for a better foreign exchange regime at the end of the year as the central bank announced to embrace a market-based exchange rate system with a target of limiting the difference among various dollar rates within 200 basis points.

The local users of dollars have been suffering from the multiple dollar rates set by the central bank.

The 25 basis points rise in repo and reverse repo to 6% and 4.25% respectively is a contractionary monetary stance by the central bank to arrest inflation within its raised target of 7.5%.         

The Bangladesh Bank removed the floor on banking sector deposit rates, pegged with inflation previously, while it kept the banks' lending rate cap at 9%, except for making it 12% for consumer credit while credit card interest has no cap.

Depositors, who are already earning less than the inflation, tend to look for better returns during inflationary pressures and the capital market might benefit from the removal of the deposit floor cap, according to analysts of two top tier brokerage firms Brac EPL and EBL Securities.

"Weaker banks would go for higher rates to grow deposits, while stronger banks get more deposits despite lower rates as depositors' 'flight to quality' shifts more liquidity to better banks," reads the MPS analysis report by Brac EPL Stock Brokerage.

"The net impact can be another round of increase in call money rates, continual pressure build-up on lending rate, and lower liquidity in a significant part of the banking system," it added.

Success in meeting the targets for inflation, credit growth, and supporting the GDP growth and employment would depend on the global scenario to a significant extent alongside how the local economic management unfolds, said analysts.