The Bangladesh Bank's latest monetary policy removing the deposit floor rate is expected to improve the liquidity condition in the stock market, said EBL Securities.
Savers will direct a part of their savings to the capital market for higher returns as the removal of the deposit floor rate will increase the possibility of the deposit rate going below the average inflation rate, it said.
Depositors, who are already earning at less than the inflation rate, tend to look for better returns against inflationary pressures and the capital market might benefit from that, added EBL Securities.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, however, expressed doubt that the capital market will reap any benefit.
He says it is unlikely that more people would invest in securities for better returns in this depressed market scenario but if the market becomes upbeat then investors may think of putting their money into stocks.
With the changes taking effect, brokerage firm BRAC EPL Stockbrokerage said, "Weaker banks would go for higher rates to grow deposits, while stronger banks get more deposits despite lower rates as depositors' 'flight to quality' shifts more liquidity to better banks."
The result might be another round of increase in call money rates, continual pressure build-up on lending rate, and lower liquidity in a significant part of the banking system, according to the analysis done by BRAC EPL.
The removal of the deposit floor rate may not bring any positive results for the stock market, said Prof Abu Ahmed, the former chairman of the economics department at the University of Dhaka.
"Liquidity flow in the stock market depends on inflation and stability in the foreign exchange market". If the inflation rate increases, the banks will have to offer higher deposit rates, added Prof Ahmed.
The 25 basis points rise in repo and reverse repo to 6 per cent and 4.25 per cent respectively is a "cautiously accommodative" monetary stance by the central bank to curb inflation within its revised target of 7.5 per cent.
The foreign exchange pressure is also expected to ease at the end of the year as the central bank announced that it would embrace a market-based exchange rate system.
The BB in its policy statement insisted that the capital market would get a boost because of the latest policy changes.
But then there would be a long chain of market responses.
For the second half of the fiscal 2023, the lending rate cap has been partially removed, allowing banks to increase the rate for consumer loans up to 3 percent points while there is no cap applied to credit card loans.
If the economic condition is suitable, the lending rate cap will be lifted altogether, the BB said. The combined effect of these relaxed rules will help grow deposits in the money market, it added.
An improvement in the liquidity flow into the money market would help banks manage their liquidity needs, said Salim Afzal Shawon, head of research at BRAC EPL.
Typically, the excess liquidity in the money market goes to credit, capital market and other banking business since return is higher. Liquidity had dropped in the overall banking system and a reversal would help the capital market, Mr Shawon added.
The BB said the near-term economic outlook is "quite favorable", but it is dependent on three external factors -- the length and intensity of the Russia-Ukraine war, the Fed's interest rate hikes, and the re-emergence and severity of Covid in China.
Easing of these external factors will improve the liquidity situation in the money market which will in turn boost the liquidity scenario of the capital market.
