Will floating exchange rates attract foreign stock investors?

Bangladesh's shift to a market-based currency exchange system marks an effective transformation of the country's macroeconomic policy approach. By allowing market forces to play a greater role in determining the value of the BDT, the government has signalled its commitment to transparency, flexibility and broader participation in the global market. These changes are expected to reshape foreign portfolio investment in Bangladesh's capital market.

The earlier exchange rate regime caused friction for foreign investors because of pricing ambiguity and difficulties in repatriating funds. Under the new system, exchange rates are set largely through interbank discussions, with the central bank intervening only to moderate volatility. The shift, partly driven by the terms of the IMF's extended credit facility, has improved market sentiment by making dollar pricing more predictable. Market liquidity and regulatory frameworks have long constrained the capital market, but with the BDT now more responsive to supply and demand, pricing volatility should ease. This signals a fairer playing field and a more transparent investment climate. The exchange rate has stabilised at around Tk 122 per US dollar, offering cautious investors a measure of optimism.

Since the fiscal year 2019-20, net withdrawals from overseas portfolio investments made through Non-Resident Investor's Taka Accounts (NITA) have been inconsistent. These peaked in 2020-21 at $409 million before falling to $75 million in 2023-24. Non-resident stock ownership declined sharply, from $2.47 billion in 2019 to about $818.5 million in 2024. Over the same period, foreign holdings of debt securities fell from $1.6 billion to $911 million.

Apart from macroeconomic concerns, structural barriers have also weighed on investor confidence. Market liquidity remains weak, exit flexibility is limited, and while the previously imposed floor prices that hampered price discovery have been withdrawn, taxation remains an issue. Capital gains on listed stocks are taxed at 15 percent, and dividends to non-resident foreigners face a 30 percent withholding tax. Although dividend repatriation needs no prior permission, repatriating capital gains involves valuation and tax clearance.

With a market-based exchange rate now in place, there is an opportunity to reverse this trend. One of the most significant benefits of the new system is reduced exchange rate volatility. This is a potential game changer for global institutional investors, particularly those managing large frontier market mandates. A more stable currency makes it easier to price risks, assess returns and invest in Bangladeshi stocks for the long term.

Alongside the exchange rate reform, there is scope to accelerate improvements in capital market governance. This could mean more efficient capital repatriation, better regulatory coordination and simpler tax and compliance procedures for foreign investors.

The path will not be without challenges. The central bank must carefully manage its actions to uphold the credibility of the floating exchange rate and avoid distorting market signals. The macroeconomic environment remains uncertain, and rising import demand could put pressure on reserves. Still, for now, strong dollar inflows from healthy exports, steady remittances and lower import costs are supporting stability. The adoption of a market-based exchange rate, coupled with efforts to broaden market participation and improve governance, is a clear signal of Bangladesh's intention to engage more fully with international financial markets. These reforms could help position Bangladesh as a transparent, reform-driven and investable frontier market. The tide might indeed be turning.

The writer is the managing director of IDLC Investments Limited