Insights: Is NEPSE Responsive to Market Interest Rate

When the subject of investment arises, the topic of return (with consideration of risk) promptly follows. In the context of investing in stock markets, macroeconomic indicators are the first factors that come to mind—specifically, the market interest rate and the trend it is forming. Theoretically, the trend in interest rates tends to have an inverse relationship with the stock market. This means that when interest rates are in a downtrend, the stock market typically experiences an uptrend. Is this theory currently applicable to NEPSE?

The Response to Change in Interest Rate Reflected in Political Appointments

If we look at the trend of the average interest rates offered by banks, the Fixed Deposit rate stood at 11.06% per annum in Magh of F.Y. 2079/80 (mid-January 2023). Similarly, the Saving Account rate was 7.44% per annum in Poush of F.Y. 2079/80 (mid-December 2022). Following these higher interest rates, BFIs (Banks and Financial Institutions) gradually reduced the rates offered to depositors. While there was a slight increase in the first three months of FY 2080/81, the overall trend showed a steady decline. By Kartik of F.Y. 2081/82, the average interest rate offered on Fixed Deposits had fallen to 7.08% per annum, and the Saving Account rate had dropped to 3.34% per annum.

Interest rates are a major factor influencing the stock market. However, in the case of NEPSE (Nepal Stock Exchange), there has significant relationship but not so much responsive in time consideration. For instance, when the interest rate began declining in Magh of F.Y. 2079/80 (January 17, 2023), NEPSE closed at 2,182.11 points on Magh 3rd. However, the index was unable to maintain this level for even three consecutive days and failed to recover it for the next 17 months, up to June 2024. In July 2024, with the appointment of Mr. Bishnu Poudel as Minister of Finance, optimism seemed to build around the declining interest rates. However, this momentum appeared to dissipate amidst political appointments, failing to generate a sustained impact on the market.

Character of Declining Interest Rate

As we know, interest rates are major factors considered as the cost of investment, specifically when investing in capital markets. In our context, the stock market index has lately been reacting to changes in interest rates.

As investors in the stock market, we always wish for lower interest rates, but this also has a petrifying characteristic. There is a lower bound limit, which means investment activities are initiated with a decrease in interest rates. However, after a certain level of decline in interest rates, it doesn’t lead to significant results in investment activities. One reason for this is that, although lower interest rates don’t boost investment activities immediately, they can still help Banks and Financial Institutions (BFIs) reduce their cost of funds, which ultimately may lead to a reduction in credit interest rates in the future. This has a stronger relationship with stock markets as well.

In conclusion, as the number of companies and listed shares continues to increase day by day, policies should be expansionary to encourage more individual and institutional investors to enter the stock market. This will increase demand and help absorb the continuously increasing supply. Only then can such an economic situation be advantageous to investors and provide them with the opportunity to witness and enjoy healthy stock market investing.

Article By: Krishna Prasad Gautam