Stocks plunge ahead of stimulus announcement

November 24, 2011

Speculation over non-inclusion of CRR, SLR reduction spread panic
Dhaka stocks plunged by 224 points on Wednesday in late panic-driven selling following a rumour in mid-session that the government’s stimulus package which would be announced after trading hours would not include reduction of banks’ cash reserve requirement and statutory liquidity ratio.
DGEN, the benchmark general index of the Dhaka Stock Exchange, on the day lost 4 per cent, or 224.30 points to close the day at 5,372.65 points.
In the previous four sessions, the index gained 947 points as prime minister Sheikh Hasina last week intervened to bring back stability in the market following 560 point plunge in three days when the market reopened after nine days of EID holiday.
On Wednesday, the DSE turnover crossed Tk 1,000-crore mark, to Tk 1,051.39 crore, for the first time after July as investors went into heavy selling.
The market opened with optimism on Wednesday as the DGEN gained around 150 points in 45 minutes after the trade began.
But after mid-hour, the DGEN nosedived when a rumour spread that the Securities and Exchange Commission which was scheduled to announce a stimulus package for investors who had sustained heavy losses in 11-month depression would not include reduction of banks’ cash reserve requirement and statutory liquidity ratio in the package.
Besides, some investors also became jittery after a news broke that the High Court had scrapped a petition by three former officials of a brokerage house to be relieved of a 1996 stock scandal case.
‘Investors knew that tussle was going on between Bangladesh Bank and SEC over the reduction of the CRR and SLR. But investors hoped that BB would reduce CRR and SLR, even if it is by a little margin, following the prime minister’s intervention,’ said a stock broker.
He said investors went for a panic-driven sell-offs in late trading as most of the retail investors considered lowering CRR and SLR as the most vital booster for the market.
‘There was a rumour in the market during Wednesday mid-hour that the stimulus package might not contain lowering CRR and SLR, and the retail investors reacted negatively,’ he said.
In some cases, there were very few sellers for many scrip in early trade and in late trading there was no buyer for the same scrip.
The SEC chairman in the afternoon announced the stimulus package without any announcement on reduction of CRR and SLR.
In December 2010, the Bangladesh Bank increased the CRR from 5.50 per cent to six per cent and the SLR from 18.50 per cent to 19 per cent to curb inflation.
Dhaka Stock Exchange suffered the first stocks crash in December-January last, when its general index lost more than 1,000 points. It has been alleged that heavy share sales by the banks to comply with the central bank’s regulations, increase their CRR and SLR, and reduce single-party exposure to the allowable limit of 10 per cent of their liabilities by August, caused the crash.
After the prime minister last week asked stakeholders including BB and SEC to come up with a stimulus package for investors, the SEC in the last few days negotiated with the central bank about lowering the CRR and the SLR but the BB turned down its proposal considering its macro-economic impact.
Mahmood Osman Imam, a professor of finance at Dhaka University, said, ‘The government might be concerned about the macro-economic effect of the matter and perhaps could not consider the proposal for now.’ 
He, however, said, ‘Although the index plunged, the rise of turnover was still positive.’
Akter H Sannamat, a market analyst, said, ‘Profit taking motive of some investors following the surge of share prices in the last few days compounded with speculation on stimulus package taking the market down below the expected level of price correction today.’
He said the stimulus package was certainly a booster for the market and the investors should behave rationally to carry on the momentum.
‘The government proved its concern about stabilising the market and now  the investors should play their game with safe hand,’ he said.
He also said that investors should not get panicked about any such case that includes only few people.
‘The investors can play a major role in the market and should not be concerned about any case that includes a few people.’  
Of the 259 issues traded on the day, 24 advanced, 233 declined, and two remained unchanged.

-With New Age input

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