DSE key index drops 1.37% on policy rate hike

The liquidity-strapped capital market has taken a big hit from a recent policy rate hike, resulting in a decline driven by weak investor participation.

The benchmark index DSEX of the Dhaka Stock Exchange (DSE) dropped 1.37% to 5,169 points, while the blue-chip index DS30 fell 1.64% to 1,892 points today (23 October).

Trading activities remained stagnant, with market turnover decreasing by 10% to Tk321 crore from the previous session. During the session, 52 issues advanced, while 306 declined and 41 remained unchanged. The market capitalisation also dropped by Tk5,685 crore, closing at Tk6.60 lakh crore.

On Tuesday, the Bangladesh Bank raised its policy rate once again in less than a month, pushing it to 10% to further make borrowing more expensive in an effort to tame high inflation. This marks the fifth hike this year and the 11th since May 2022, when the policy rate was at 5%. Earlier, on September 24, it rose from 9% to 9.5%.

Market insiders indicated that the policy rate hike is likely to drive deposit rates higher, encouraging investors to favour fixed deposits over investments in the capital market. Additionally, rising yields in government securities have further drained liquidity from the capital market.

SM Galibur Rahman, head of Research and Strategic Planning at Shanta Securities, told The Business Standard that the 50 basis-point policy rate hike, coupled with the increase in short-term bill rates this week, should impact money market liquidity. Consequently, the equity market is expected to be negatively affected. Furthermore, as the earnings season begins, investors are anticipating subdued earnings in this quarter, which is also impacting the market.

In general, rising interest rates hurt the performance of stocks. As interest rates rise, individuals can expect higher returns on their savings, reducing the incentive to invest in stocks, according to financial analysts. Changes in interest rates broadly influence stock prices, bond interest rates, consumer and business spending, and the overall state of the economy.

However, there is often a time lag between an interest rate change and its effect on the economy. Some sectors react quickly, such as the stock market, while the effects on mortgages and auto loans can take longer to manifest.

EBL Securities noted in its daily market review that the depressed capital market suffered from dominant selling pressure after just two sessions of brief positive sentiment as risk-averse investors continued to trim their equity exposure amid waning confidence. The central bank's latest policy rate hike further strained the ailing market.

The relentless bearish trend remained dominant throughout the session, with the majority of stocks experiencing significant price corrections due to the ongoing pessimism pervading the trading floor, leaving investors in a state of persistent uncertainty.

The interest rate on Treasury bills, a tool used by the government to borrow from the banking sector, increased by 30 basis points a day before the policy rate hike. According to central bank data, in Monday's auction by the Bangladesh Bank, funds were borrowed from banks at an interest rate of 11.75% for 91-day Treasury bills.

Additionally, commercial banks will receive 11.90% interest on 182-day Treasury bills and 11.99% on 364-day Treasury bills. These interest rates on Treasury bills were 11 to 30 basis points higher compared to the auction held on October 14.

Moniruzzaman, managing director of Prime Bank Securities, said the yield on Treasury bonds is currently over 12.50%, making them a much more secure investment compared to the stock market. As a result, a significant amount of capital is being allocated to Treasury bonds.

Furthermore, the announcement season for company dividends, which typically concludes in June, is underway. However, investors are sceptical about companies' ability to pay substantial dividends this year, leading to a lack of interest even during the dividend season.

On the sectoral front, banking sector stocks accounted for the highest turnover at 23.9%, followed by pharmaceuticals at 13.2% and the food sector at 11%. All sectors displayed dismal returns, with paper, life insurance, and IT experiencing the most negative returns on the bourse.

Ifad Autos led the gainers list, with its share price surging 9.92%, followed by Vanguard AML BD Finance Mutual Fund, Kattali Textile, and Bangladesh National Insurance.

On the other hand, ML Dyeing was the top loser, with its share price dropping 12% to Tk 7.3 each after the company failed to recommend any dividends for the 2023-24 fiscal year.

It was followed by Baraka Power, which saw a decline after announcing the closure of one of its power plants due to the expiration of a power purchase agreement. Singer Bangladesh also faced losses, reporting a negative performance for the July-September quarter.