Flexible exchange rate and market-driven interest rate that the Bangladesh Bank has adopted to help the economy heal brings no good news for the stock market for now but there is light at the end of the tunnel.
If the policy shifts lead to macroeconomic stability, which is what the central bank is aiming to achieve by taming inflation and helping foreign exchange reserves replenish, the equity market will be able to reverse its losses.
But that will take some time to happen.
The central bank on Wednesday decided to move away from interest rates being regulated by the benchmark rate called SMART (six-month moving average rate of Treasury bills). At the same time, it embraced crawling peg to allow the exchange rate to fluctuate within a predefined range. That caused the taka to lose value further against the dollar by Tk 7 in one go.
In immediate impacts, companies and the stock market will endure a liquidity shortage as the interest rate is likely to go up for it is now determined by market forces.
The market-based interest rate will drive up the cost of doing business, discouraging entrepreneurs from taking up expansionary projects.
On the other hand, profitability will shrink further if firms rely heavily on imported raw materials or sell foreign products in the domestic market.
"Companies that earn in dollars will be benefited. Companies that use Bangladeshi labour and materials to make products and sell outside the country will gain a higher income," said Emran Hasan, managing director and chief executive officer of Investit Asset Management.
Most exporters in Bangladesh do not source all raw materials from the local market.
Mr Hasan said the more manufacturers would add value the more revenue and profit they would earn.
Listed banks and other financial institutions and the textile sector are the ones that will find the evolving financial landscape in their favour right away. Pharmaceutical companies' profits will shrink but they will bounce back soon, added Mr Hasan.
However, dented market sentiment may influence stocks negatively anyway while investors will be inclined to move to fixed-income securities and money market for higher returns.
Import-dependent companies will bear the brunt of the latest policies.
They will have to buy dollars at a higher rate to import goods and will face the risk of a decline in demand for costlier products. Companies may refrain from passing on entire additional costs to consumers, fearing revenue fall.
Moreover, borrowers of foreign funds will bleed, owing to higher repayments, even if the interest rate on credits remains the same.
Md Moniruzzaman, managing director & CEO of Prime Bank Securities Limited, gives a glimpse into a changing scenario in mid- to long-term.
"As the dollar rate rises, if it works properly, the dollar reserve should increase in the future. Many companies now avoid bringing back dollars for a low exchange rate. If the dollar-taka exchange rate becomes rational, they will get dollars repatriated. Also, the flow of remittance will go up," said Mr Moniruzzaman.
On the other hand, higher interest rates will curb inflation.
Lower inflation and higher foreign exchange reserves will help the economy rebound.
And foreign investors, who have left the equity market to not deal with the hurdles in getting funds back to their countries for the dearth of dollars, will return.
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