The monetary policy is believed to dictate the course of the securities market throughout the fiscal year. Monetary policies regulate or facilitate financial institutions based on the condition of the economy. This in turn has an impact on the overall economy, since banks and financial institutions are the pumping heart of the financial circulation system.
The monetary policy is especially impactful on the stock market of Nepal, since financial institutions make the strongest sector in our securities market.
It is in the interest of the common investor to know how the stock market behaves after the central bank unveils the monetary policy of the year.
With that in mind, we have compiled the monetary policies of the last 4 fiscal years and the current fiscal year and studied how the market reacted to the policies.
1. We simply study the performance of the NEPSE index during the immediate weeks or months after the policy was announced. There is no way to determine whether the move was caused by the monetary policy, or any other factor.
2. All the first four fiscal years we analyzed fell inside the longer bearish trend that started from FY 2073/74. Thus, the bigger-picture trend is always bearish in our frame of reference.
Now that those things are clarified, let us proceed.
Monetary Policy 2073/ 74
The monetary policy for the fiscal year 2073/ 74 was unveiled on Ashad 30, 2073 BS (July 14, 2016).
The main objectives of the monetary policy were to attain 6.5% economic growth, limit inflation to 7.5 per cent and keep broad money growth at 17% to curb demand-driven inflation. Its other objectives were to increase domestic credit by 25% and increase credit to the private sector to 20%.
Note that this was the time when the adverse effects of the Madhesh agitation and the Indian blockade were still hounding the economy. Inflation was hovering around 11%.
To control the unnatural bullish trend, margin lending rate was reduced to 50% from the previous 60% of the value of the shares collateral.
On the day the monetary policy was announced, NEPSE closed in green at 1718.30. 2 weeks after this date, NEPSE reached its all-time high of 1881 levels.
However, it should be noted that the monetary policy was announced near the peak of the already-aggressive bull market that lasted from 2068/69 to 2072/73. The market then entered a bear phase that lasted for about 4 years, and has shown signs of ending only by the recent spike formation.
Governor Nepal unveils monetary policy; Monetary Policy not as tight as expected for share market
Monetary Policy 2074/ 75
This policy was unveiled on Ashad 25, 2074 BS (July 9, 2017).
It was formulated to achieve the budget’s target to achieve 7.20% economic growth.
Commercials banks were made to disburse at least 10% of their loan portfolio in agriculture, 5% in hydroelectricity, 5% in tourism and the rest 5% in other priority sectors for a total of 25% to be lent to priority sectors.
NRB had also withdrawn the relaxation it had provided when calculating CCD ratio. CCD ratio had to be maintained at a maximum of 80%. Earlier, NRB had relaxed CCD ratio through mid-term review of monetary policy for 2073/74.
Margin lending rate was further limited to only 40% of the value of an investor’s portfolio.
While the policy was unveiled, NEPSE was going through an intermediate downtrend of nearly three months. NEPSE had just retaliated from 1540 levels to 1580 levels in the two days before the monetary policy was announced.
Almost immediately after the monetary policy was announced, NEPSE went through a bullish uptrend.
However, the steam couldn’t propel the NEPSE index any higher than 1668 level. The index then began to slide after about a month, i.e. from August 14, 2017.
NRB unveils monetary policy for FY 2074/75; margin lending capped at 40% of core capital, further curb in real estate loans inside KTM
Monetary Policy 2075/ 76
The monetary policy for the fiscal year 2075/ 76 was announced on Ashad 27, 2075 BS (July 11, 2018).
The total margin loan that a BFI can disburse, set at 40% of its core capital, was decreased to 25% of the core capital by this monetary policy.
About two months before the monetary policy was announced, NEPSE had showed strong movement of reversal of the ongoing bearish trend. NEPSE had gone through a steep incline from 1160 levels to 1438 levels.
However, by the time the policy was announced, NEPSE had almost lost all it gained and was retaliating at around 1200.
As seen by the market movement, this policy was neither received with enthusiasm nor with negativity. The market did not reveal any immediate movement or change in course. NEPSE gradually lost till the end of August, then showed a bullish correction, before eventually being engulfed by the bigger 5 years long bearish trend that had started from 2073/ 74.
Monetary Policy for fiscal year 2075/76 unveils today; Major updates
Comparative Synopsis of Monetary policy for the fiscal year 2074/75 and 2075/76; things that have changed and things that remain the same
NRB publishes mid-term review of Monetary Policy 75/76; what were the major takeaways?
Monetary Policy of 2076/ 77
The monetary policy was unveiled on Shrawan 8, 2076 (July 24, 2019).
Nepal’s GDP had seen three highs in the last five years from 3.30% in FY 2071-72 to 7.40% in FY 2073-74. Nepal had also seen a drop in its inflation rate in the last five years (2071-76), from a record high of 9.90% in FY 2072-73 to 4.50% in FY 2075-76.
Margin lending rate by keeping shares as collateral was kept at 65%.
NEPSE was around 1280 while the monetary policy was announced. It was mostly trading sideways and was beginning to trade upwards just when the policy was announced.
Generally, in a bullish period, the market makes new highs with occasional bearish pullbacks. In the same way, in a bearish period, the market makes new lows with occasional bullish pullbacks.
However, from the next day the monetary policy for 2076/ 77 was announced, the market went through a sliding decline for about two months without even showing bullish pullbacks. The chart shows a straight, steep decline, with not even decreasing highs in sight.
15 major bulletins from NRB circular based on monetary policy
Changes in major policy rates by Monetary Policy of FY 2076/77; See three year comparison
Monetary Policy of 2077/ 78
This policy was unveiled on Shrawan 2, 2077 (July 17, 2020). NEPSE index was at 1360 levels before the policy was announced.
A week after the monetary policy was unveiled, the NEPSE index made a swing of 161.42 points, with turnover rising by 40.77%.
From the start of the year 2020, many investors have opined that the 5-year long bearish market has ended and a new bull phase is beginning.
This is probably the reason why NEPSE surged to 1600 levels on February during such a short span. However, NEPSE came down as fast as it went up.
Nevertheless, NEPSE is on an incline now and many think this trend, unlike the first spike, is here to stay.
Significant proportion of investors think that the monetary policy will bring more volatility and investor participation in the market. Banks have reduced the interest rate on loan against shares, while at the same time the upper limit on margin lending has been increased to 70%. Moreover, CCD Ratio has been increased from 80% to 85%.
Also, BFI's with a distributable profit higher than 5% of their paid-up capital will be allowed to distribute 30% of dividends as cash dividend in maximum. However, companies that satisfy this criterion can't distribute cash dividend that amounts to a larger sum than their Deposit Weighted Average maintained in Ashadh 2077. This means that banks will have to distribute most of their dividends as bonus shares, which is a profitable news for investors.
Monetary Policy for the fiscal year 2077/78 unveiled today; highlights with full text
Watching how the trend changes pace (or direction) after such periodic events is an interesting form of analysis. Anyone with a device and an internet connection can research on such events.