The devaluation of the taka against the dollar with few recent corrections in the stock market has rattled both local and foreign investors, triggering the pull-out of funds amid an increasing interest rates cycle.
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 from the Dhaka Stock Exchange (DSE).
Last year, the outflow of foreign investment was Tk5,000 crore, while the inflow was Tk2,000 crore.
Although the Bangladesh Securities and Exchange Commission (BSEC) 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, market insiders and stock market officials told the Dhaka Tribune with great regret.
The stock market was seeing a healthy rise back in 2021 when the inflation was in check and money rates were cheaper, resulting in an appreciation of 20.3% in the benchmark index of the Dhaka bourse during the year with an average daily turnover of Tk1,475 crore.
Risk-averse investors have been on a selling spree as the inflation hit an eight-year high of 7.42% in May, said International Leasing Securities.
Bearish sentiment was fueled by a heavy sell-off that emerged since investors were unnerved over the eight-year high inflation, according to EBL Securities.
The benchmark index of the Dhaka Stock Exchange dived 7.23% this year while the average daily turnover stood at Tk969 crore, down by 34.3% in comparison with the previous year, shows the data obtained from the exchange website.
According to the data obtained from the Bangladesh Bank website, the 364-day treasury bill yield rate stood at 6.66% on June 13, which was 3.45% on January 10 earlier this year.
“However, increasing interest rates due to declining liquidity in the financial systems and Ukraine-Russia war driven cost-push inflation across the globe have put brakes in the stock market rally,” said the Deputy Head of Research at UCB Stock Brokerage Ltd Sakib Chowdhury.
“Stock market investment becomes less lucrative during periods of high-interest rates as investors can avail better returns elsewhere and tend to pull out the fund from the stock market,” Chowdhury explained.
According to Chowdhury, amid high inflationary pressure, companies might find it difficult to pass through the increased costs to customers to retain their profitability. Hence, higher inflation reduces investors' expectations of earnings growth, putting downward pressure on stock prices.
“Over time, company earnings match up to the price inflation, which might be positively reflected in stock prices,” he added.
In the meantime, in his proposed budget speech for FY23, Finance Minister AHM Mustafa Kamal said the exchange rate of the 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, emphasized the need for foreign investment to support growth. So, the government decided to provide an opportunity for the legalization of money and assets laundered abroad in the past. Although economists believe that such an opportunity would give a wrong message.
How devaluation affects the stock market
Bangladesh Bank started devaluing the taka against the dollar in August last year to give the economy an advantage amid rising import expenditure and the slowdown in remittance and export earnings.
Foreign investors started to sell shares from the beginning of the year to avoid loss from a possible correction in the exchange rate amid globally rising dollar prices following the Russia-Ukraine conflict.
In January last year, the inter-bank exchange rate was Tk84.8, 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 Tk92.8 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.
Tahmidur Rahman also contributed to this report.