Will the Rally Continue After the Announcement of Monetary Policy 2081/82? A Look at the Last Five Years’ Market Reactions

In the past five years, the NEPSE index has shown limited growth following monetary policy announcements, with the exception of one fiscal year. From fiscal year 2076/77 to 2080/81, the stock market has generally experienced a bearish trend after four consecutive fiscal years of monetary policy implementation, with only one fiscal year displaying a significant bullish trend. 

Fiscal Year 2076/77:

On July 24, 2019, Governor Chiranjibi Nepal announced the monetary policy for fiscal year 2076/77. This announcement initially caused a modest uptick of 6.90 points in the NEPSE index, which rose to 1284.07 points. However, this was followed by a prolonged downtrend marked by consecutive lower lows and lower highs. The NEPSE index took 176 days to return to the 1284.07 level. During this period, the index saw a notable drawdown, falling by 182.53 points to a low of 1102.46 points. 

Fiscal Year 2077/78:

The monetary policy announcement on July 17, 2020, by Governor Mahaprasad Adhikari led to a significant upward movement. The NEPSE index surged by 84.26 points to 1479.03 shortly after the announcement. This rally extended into a sustained uptrend, ultimately reaching an all-time high of 3227.11. The index climbed from 1460.15 to 3227.11 over 396 days, representing a gain of 1818.60 points, or a 129.12% increase. This period saw the implementation of an ultra-loose monetary policy designed to stimulate an economy weakened by the Covid-19 pandemic. This policy significantly increased market liquidity and fueled excessive credit flow into the stock market. While the expansionary monetary policy spurred credit growth, its broader economic benefits were limited, leading to substantial deleveraging. 

Fiscal Year 2078/79:

On August 13, 2021, Governor Adhikari announced the monetary policy for fiscal year 2078/79. The introduction of the 4/12 policy, which imposed stricter credit regulations, triggered a negative response from the stock market. The NEPSE index initially declined by 24.57 points. Although it later rebounded to 3180.86, this growth proved unsustainable. A bearish reversal ensued, characterized by a series of lower highs and lower lows. The market continued to fall by 1349.12 points over the following 340 days, reaching 2044.72 before the announcement of the monetary policy for fiscal year 2079/80. This decline represented 39.83%. 

Fiscal Year 2079/80:

The monetary policy announced on July 22, 2022, for fiscal year 2079/80 resulted in a market correction. During this period, the NEPSE index entered a ranging market, fluctuating between 1800 and 2200, with declining market breadth and negative sentiment.

Fiscal Year 2080/81:

Similarly, the monetary policy for fiscal year 2080/81, announced on July 23, 2023, disrupted the market's prior upward momentum, leading to another downturn. The market broke out of the previous range of 1800 to 2200 upward before the announcement of the monetary policy for fiscal year 2081/82. 

Outlook:

Historical data reveals that the stock market generally trends bearish following monetary policy announcements, with the exception of the record-breaking year. Currently, the stock market is experiencing a notable pre-monetary policy rally, driven by bullish investor sentiment and positive technical indicators such as rising moving averages and increased trading volume. Investors are closely monitoring key support and resistance levels to assess future market direction. Given past trends, a post-monetary policy correction appears plausible. However, if the market aims to surpass previous records, the current bullish momentum, supported by robust fundamentals and positive technical indicators, may persist throughout the fiscal year, potentially setting new benchmarks.

Key Technical Indicators to Watch:

• Relative Strength Index (RSI): For identifying overbought or oversold conditions. 
• Moving Average Convergence Divergence (MACD):To detect momentum shifts. 
• Bollinger Bands:For assessing market volatility. Fundamental analysis will remain crucial, with investors paying close attention to monetary policy statements, interest rate changes, and economic data releases to guide their trading strategies. 

Article By: Rajat Shrestha