Uncontrolled rise in interest rates likely to increase heat in the winter; Is Nepalese Stock Market prepared for it?

Thu, Dec 6, 2018 5:01 PM on Economy, Exclusive, Latest, Stock Market,

- Puskar Shrestha

About 9 months have passed since the infamous case of NIC Asia getting banned by the commercial banks for violating the agreement to maintain the interest rate took place. The commercial banks had been on a never ending competition for increasing the interest rates for the deposits. After much effort of the banker’s association, the situation had been brought under control.

Fast forward 9 months and we are on the verge of facing the same situation now. The commercial banks have again entered in the “Who will provide the highest interest rate?” competition. Recently, Janata Bank introduced its FD scheme with 12% interest rate which was followed by Kumari Bank’s FD with 13% interest rate. It is just a matter of time for most of the commercial banks entering in this contest.

As usual the banks have been facing shortage of investable funds and are adopting easier ways to collect the fund from the general public.

The impact of uncontrolled rise in interest rates

Such rise in the interest rates will be highly beneficial for the public who are used to depositing money in the banks rather than making further investments. The return will be higher and the choices for the people will also be multiple as the schemes will always be differing and competitive.

With the introduction of such schemes, the general public will be highly motivated to deposit their fund in the banks rather than making investments in any other option as it would be a quicker, easier and safer method to make money.

But, what will happen to the stock market?

The current condition of the stock market is quite helpless. The market has been on a losing spree and the investors as well as the regulatory bodies have been able to do nothing about it. The introduction of online trading has proved to be a failure, personal feuds of the regulatory bodies have just been resolved and the investors have announced hunger strike demanding the resignation of the Finance Minister. There is nothing right going on with the Nepalese stock market.

The level of impact that can be caused by such rise in interest rates can be easily imagined. The market is already in a vulnerable state in which a person’s statement is enough to hurt the sentiment of the investors. In such situation, commercial banks’ freedom to increase the interest rates might not be a good news for the stock market.

Many investors have already started exiting from the stock market and with the introduction of higher interest rates, the numbers will only increase. There have been also abundant rumors surrounding the possibility of market crash due to the interest war along with the pre-existing condition of the stock market.

Regulators by act or Regulators on paper?

It is not a subject to doubt that capital market is an integral part of the economy. For a small and developing economy like ours, all the branches of the country’s economy is equally important. And it cannot be ignored that all the branches are interdependent to each other. So, the fall of a part cannot give boost to another.

The regulatory bodies are there for a reason. But, it does not seem if they care about the current situation. Nepal Rastra Bank tried in its own way to handle the situation by injecting funds in the banking system but it is hardly a sufficient effort. The regulatory bodies of the stock market i.e. SEBON, NEPSE and CDSC have not taken a step yet. The continuous decline of the stock market has not been able to draw the attention of the regulatory bodies.

The investors have been losing crores of rupees on a daily basis which should have been an important subject of discussion, but it has not been. Now the ‘interest-war’ is likely to make the stock market bleed red and we are not sure if the regulatory bodies have prepared anything to tackle it.

From the Finance Minister citing the stock market as an unproductive sector to the banks ready to raise the interest rates without any bars, the Nepalese stock market is supposed to fall on its feet.

We can only hope that the regulatory bodies soon take some action to control the situation, or it might be too late.