Base Rate: "Bhasmasur" of Share Market?

The market touched an all-time high during the pandemic period and investors were guessing and expecting Nepse to touch another high of 4000 in near future. After gradual relaxation in the pandemic, the share market continued to decline from 3200 (an all-time high) rather than going beyond 3200. But to everyone's surprise, the market declined to 2200 points thanks to high capital gains, frequent changes in directives of Nepal Rastra Bank (NRB), a corruption scandal in Nepse as well as continuous relaxation of covid policy by the government.

There was fear that the market will run in the bear pattern. However, the market rose again from the point of 2200 and with a new twist it reached almost 3000 points. Investors were happy to see Nepse reaching this point within a small time frame. There was no fear in the market and short-term holding and profit booking were common again. The market was again poised to touch the psychological level of 3200 in the eye of general investors but another surprise was waiting for them.

The market began to get a few corrections initially and big corrections afterwards. Nepse further declined to 2200 points and all people were looking for the same pattern to increase from that sensitive point. Alas, the market fell below that point and as of writing, it is at the 1800 level. There are two types of views of thinking at the moment. The first view is, that this trend already followed a bear market pattern and will continue to decline in the coming days. The second view is the optimistic view that investment in the share market will now continue to rise and is good for both the short and long term.

Both views have their arguments and support from various intellectuals, academics holder, share market experts and even investors.

However, it is in the hand of the economic situation, liquidity in the market and finally interest rate to determine where the share market swings. As everyone already knows the economy of Nepal and liquidity from various news, social media sites and even other websites I would like to give you a small insight on the impact of interest rate (normally base rate) on past share market and current share market.

The interest rate is nothing but the amount of interest due per period. It can be in deposits, loans and principal. Likewise, the base rate is a minimum interest rate below which banks cannot lend money to their customers. For instance, if the base rate of any commercial bank is 8% then the interest rate on a loan should always be higher than 8%. It is found that the relationship between base rate and share market is inverse. If the base rate remains low for a long time, the share market increases rapidly. But if the base rate remains high for a long time, the share market decreases rapidly.

The following tables will show the relationship in detail.

Table 1.1

This table (1.1) depicts information that when the base rate of Everest bank is high (8.37%) at an initial stage, Nepse was roaming around 1300 points. When the base rate was minimum (5.98%) the market touched an all-time high of near 3200. Afterwards base rate increased to 8.92% at present and NEPSE is sitting below 2000 point.

Table 1.2

Table 1.2 also shows the same pattern. When the base rate was hovering around 6% till August 2016 Nepse touched an all-time high of 1880. When the rate increased to 9.81% in January 2017 Nepse fell to 1500 points. Afterwards base rate remain high for 2 years till January 2019 and Nepse reached the bottom of 1160.

Sources:

Everest bank limited (https://everestbankltd.com/supports/interest-and-rates/base-spread-rate/ )

Nepal Sbi bank limited (https://nsbl.statebank/base-rates)

Sharesansar

Nepal stock exchange

Nepsealpha

The base rate of Everest bank and Nsbi are included for research because they were easily available on their respective websites and readers can check on their own to find real data and information as evidence.

Pushpa Moktan

BBA graduate 2019, Peoples Campus