Tight money policy clouds near-term equity outlook but offers medium-term hope

Bangladesh's capital market is expected to remain on a mixed trajectory in the near term as the central bank's tight monetary policy continues to delay a broad-based liquidity recovery.
Persistently high interest rates will continue to divert funds towards fixed-income instruments and weigh on corporate earnings, limiting the scope for a strong market rally in the near term.
"As interest rates are expected to remain elevated, fixed-income instruments, including government securities and bank deposits, may continue to attract investor funds," EBL Securities said in its analysis of the latest Monetary Policy Statement (MPS).
However, declining treasury yields, exchange rate stability, easing inflation, targeted policy support and ongoing financial sector reforms are expected to strengthen investor confidence and improve market conditions over the medium term.
Yield rates of treasury bills and bonds have been showing a declining trend over the past one month. The steady decline in treasury yields could gradually improve the relative attractiveness of equities by narrowing the return gap between fixed-income instruments and stocks over the medium term.
"If inflation continues to ease and macroeconomic stability improves further, investor sentiment in the equity market may strengthen over the medium term," according to the stockbroker.
Bangladesh Bank kept its policy rate unchanged at 10 per cent for the first half of FY27, maintaining its contractionary stance to curb inflation, while announcing a Tk 600 billion refinancing and stimulus package for eligible financially distressed businesses. The move indicates BB's attempts to support economic recovery while preserving macroeconomic stability.
"Eligible ailing listed companies may benefit from the Tk 600 billion stimulus package, as access to low-cost financing could help restore business operations," said EBL.
According to an analysis by BRAC EPL Stock Brokerage, the monetary policy is selectively supportive for equities but is not broadly 'risk-on', meaning it favours certain sectors.
Banks remain the most policy-sensitive sector, said the stockbroker, adding that stronger banks benefit from treasury gains while weak banks remain exposed to non-performing loans, provisioning, resolution risk, and capital pressure.
Elevated interest rates and weak private sector credit growth are expected to continue weighing on corporate earnings, particularly for highly leveraged and capital-intensive listed companies.
Manufacturing companies heavily dependent on bank borrowing may continue to face higher finance costs as the cost of borrowing would remain high. Simultaneously, higher borrowing costs are likely to delay expansion plans and suppress near-term investment activity.
In contrast, companies with strong cash reserves and exposure to fixed-income investments are expected to benefit from high interest income.
For example, the non-operating income of state-run listed entities, particularly oil distributors, outstripped their operating income in recent years because of their huge cash reserves.
Meghna Petroleum, Jamuna Oil, and Padma Oil will stay ahead of their peers in financial performance owing to interest income as they have huge cash.
Some listed companies from the private sector will also find the elevated lending rate favourable, such as Square Pharmaceuticals, Olympic Industries and Marico Bangladesh.
However, the interest rate spread, capped at 4 percentage points, is expected to moderate the earnings growth of listed banks and non-bank financial institutions, said Akramul Alam, head of research at Royal Capital.
The central bank instructed banks to keep the weighted average difference between lending and deposit rates, known as the intermediation spread, within 4 percentage points for all sectors except credit cards and consumer finance.
That means the gap between lending and deposit rates must not exceed 4 percentage points, which will reduce financial institutions' net interest income.
However, a stable exchange rate is expected to reduce foreign exchange losses for import-dependent listed companies, while exporters are likely to maintain their pricing competitiveness.
Exchange rate stability amid a stable political environment may also help restore foreign investor confidence, given the capital market's attractive valuations, according to EBL Securities.
However, foreign investors are likely to remain cautious amid geopolitical, macroeconomic and financial sector challenges, it added.
Meanwhile, Bangladesh's stock market staged a strong recovery in the first half of 2026, with the benchmark index of the Dhaka Stock Exchange (DSE) surging more than 18 per cent, buoyed by signs of macroeconomic rebound and growing optimism over sweeping regulatory reforms.
The surge in the index after years of depression reflected a gradual return of investor confidence as the newly elected government stepped up efforts to restore market discipline and revive the broader economy.

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