The current bearish trend of stock market explained: Increasing deposit interest rates and government policies to be blamed!

“Should this be my next buy?”, “Is this the peak price for this company?”, “Should I wait one more day?”

These are the anticipations that investors keep coming across in Nepalese stock market. What more?

“Sir, how many days more?”, “Did you grab that last share?”, “So, what’s the next big catch?”

These are some normal conversations heard among investors in trading floor.

However, the scenario has been very different since last few weeks. The overly crowded stock trading floor witnessed declining volume of investors in the trading floor. The post-election excitement has now been turned down among traders. The local bourse that has taken a downward trajectory this month left investors with solely “buy" option. The declining share prices have been attributed two major factors in today’s context. Firstly, the liquidity crunch claimed by banking industry is one of the reasons the stock market is seeing a declining trend. Secondly, government’s policy to concentrate on highly productive sectors only and lack of budget utilization is regarded as a demotivating strategy towards the upliftment of stock market. Banking industry and stock market: History has always shown the banking industry and stock market in Nepal is interrelated with each other. This must be because the banking industry holds higher market capitalization compared to other sectors in the stock market. Besides, every time banks announce their new policies, its reflection is seen in the stock market. For instance, when a bank announces its new effective interest rate on loan, it is not only the credit officers of the bank who are bombarded with phone calls and text messages but also the brokerage firms. The liquidity crunch in the banking sector is quite evident in Nepal in the present context. Several commercial banks are competing with each other on the basis of their deposit interest rate. These banks have adopted increased fixed deposit interest rate as a weapon to fight liquidity crunch. Why recent increase in deposit interest rate is a demotivating factor for stock market? The increased deposit interest rate adversely affects the interest rate. Any rational investor looks forward for higher return on their investment. Now that, the fixed deposit interest rate hovers around 12% to 13% among commercial banks, it is likely that investors will shift their choice of investment. Those investors who once tracked their stock investment portfolio will now be seen among bankers inquiring about their fixed deposit account policies. This means investors will retain their income in fixed deposit instead of investing in stock market. With less investment in stock market, the market is seen in a declining trend. Why banks fear liquidity crisis? Liquidity crunch in banking sector means banking industry lacks enough cash to mobilize their operation. With NRB’s direction to increase their paid up capital, banks have adopted strategies of issuing shares, merger and acquisition to meet the required paid up capital. So far, 18 out of 28 commercial banks have increased their paid up capital to Rs 8 arba and more as per the requirement. After meeting up the capital requirement, it is equally necessary for these banks to expand their business. In order to expand the business, banks must be able to retain their existing loan clients and attract potential loan clients. Besides, if the demand for loan portfolio of banks increases but they lack the fund for the fulfillment of the demand of loan, the banks will ultimately lose their business. With lack of cash in hand for banks, deposit collection can be a source of fund to the banks. Hence, banks fear liquidity crisis as it can be difficult for banks to sustain the business. Why did banks suddenly notice they will fall sort of funds? The ongoing debate on current liquidity crisis has prevailed among the experts and authorities of banking industry. Besides liquidity crisis, there are other two recent incidents that have led banks to increase their interest rate in deposit. The first logic behind the increasing interest rate is NCELL’s repatriation of dividend and second logic can be attributed to the tax obligation to be fulfilled by companies in the month of Poush. For instance, our sources claim banks hold a majority of deposit collection from NCELL i.e. around Rs 80 arba. So, the decision of NCELL to repatriate their income outside Nepal will lead banks with fewer funds. Therefore, banks which are already in the verge of liquidity crisis are increasing their interest rate with the hope of collecting funds required for investment. Besides, according to few sources, all the existing companies have advance tax obligations around Rs 80 arba to be fulfilled within the month of Poush. The banks will further lose funds from these companies in terms of tax payment. Hence, banks are seen increasing interest rate in deposit collection with the hope of collecting funds for investment. Government’s policy and stock market: In addition to the new interest rate policies adopted by banks, government’s efficiency is also to be equally blamed for the bearish stock market. For instance, as of Kartik end, government has spent only Rs 17.86 arba out of Rs 335.17 arba allocated for capital expenditure. Investors are losing confidence in the stock market due to such low expenses. Besides, the remittance growth has been seen declining and thus, may worsen the source of fund in the economy in the days to come. This might result in lack of fund for investors to invest in stock market. NRB’s certain policies have been seen as a discouraging factor for investors in stock market. NRB’s direction for banks to invest in productive sectors is quite commendable in terms of economic development. However, due to the same direction, banks will eventually discard share loans to the investors. Hence, it will have a negative impact on share market as the investors will have difficulty in borrowing loans from banks for the investment in shares. When it comes to investor’s return seeking objective, several questions still remains unanswered. Will the banks be able to maintain the cost of fund given the higher deposit interest rate? Will stock market players favor the policies introduced by NRB against the stock market? Will stock market recover from the declining trend? Will new government’s policies favor the stock market? What are your views on current stock market? Please do leave your opinions in the comment section below.