Central bank cautious while BSEC wants more money flow in stock market

Stock investors now seem to have fallen in a mixed state as they are facing the opposite moves from the two influential regulators — The Bangladesh Bank and The Securities and Exchange Commission (BSEC) — regarding money flow into the bourses.

Moves since the beginning of 2020 by the two regulators helped the stock market attract funds and secure a much desired recovery from its decade-low in the last year.   

DSEX, the broad-based index at the Dhaka Stock Exchange (DSE), gained 87% from its March 2020 trough.

However, the Bangladesh Bank appears to be concerned about any overheating of the markets recently has demonstrated its cautious position through urging for no borrowed fund diversion into the stock market, floor setting for deposit rates at per inflation, mopping up some of the surplus liquidity in banks and asking banks to report their capital market exposure every day.

Each of the recent central bank moves are caution elements for stock investors and the market seems to have faced some hiccups after a four-month rally which pushed the new generation stock indices at record high amid the turnover boosted near to that in the pre-crash days of 2010.

Meanwhile, the BSEC, which is desperately promoting the country's capital market home and abroad, has positively responded to the worries of capital market groups, such as brokers and the merchant bankers, who have been saying that the market is not overheated at all and it has a huge potential to grow with the economy, in fact, it needs to catch up to best utilize the market in economic development.

BSEC on Thursday used its old popular tool to boost investors' confidence and fund flow into the market—the level of margin lending.

It said stock investors can avail up to 80% margin loans against their equity until the DSEX crosses over 8,000 mark, which was set at 7,000 mark earlier this year.

On Thursday, DSEX closed at 6,699 and the leverage lover investors were in a fear that surpassing the 7,000 mark the DSEX would reduce their borrowing ceiling at 50% of their equity; a market cooling event.   

However, the raising of the uncommon arbitrary benchmark to control the stock buying with borrowed money helped investors breath at the end of a week when the central bank mopped up around Tk8,000 crore from banks through its bills having a tenure of 91-365 days and the yield of the bills more than doubled-tripled overnight while deposit rate in the top tier banks have gone up from less than 4% to over 5.5% in a week.

Since, the deposit rate is going higher, the most competitive banks have begun raising their lending rates, especially for the retail loans, to the ceiling for securing a fair spread.

The push, the pause and what is next?

To tackle the pandemic fallout, the government gave the economy a hand with its trillion Taka package of subsidised working capital loans to the country's manufacturing sector.

The stimulus in conjunction with the poor private sector credit growth, already ceilinged lending rate, and the limiting of the investment scope in the most generous national savings scheme had resulted in a record low interest against bank deposits and also bank loans.

Of course, the cheap and abundant money helped the real economy recover from the series of Covid-19 shocks.

Also, the stock market has got the best shots in its arm as more and more savers turned to the capital market for a better return.

The scenario had been desired for the entire previous decade, as almost everyone was praying for the stock market recovery to save the investors hurt from the 2010 bubble and bust. But nothing used to work to stop the market fall until the mid-2020 and bottom out from its 2013 low.

However, the discourse of the universal problem with the cheapest ever money, which was intended to pop up the real economy, rather is heading towards financial assets and arguably creating bubbles, already has been back in Bangladesh after a long break since 2010.

"When it is party time for stock investors, the Bangladesh Bank seems to have become concerned," said  Faruk Hossain, an accountant of a private firm who switched majority of his savings into stocks earlier this year.

"When the two regulators worked inline that benefited the stock investors and vice-versa," he added.  

Bangladesh Bank's body language is clear that it wants to avert the repetition of 2010, Faruk observes like most other investors.

"But, the biggest question is, "Is the stock market overheated?"

"It is a confusing situation for us when the two most relevant regulators appear to have the opposite perspectives," the experienced stock investor told The Business Standard.