Banking and financial institutions’ margin loans for equities shot up 9 percent from mid-August to mid-September. The Rs 8.3-billion increase brings the total to Rs99.7 billion. In the prior month (mid-July to mid-August), these loans grew by Rs1.3 billion. At the end of the last fiscal year through mid-July this year, they stood at Rs90.1 billion. Banks are wallowing in excess liquidity, and interest rates are meaningfully lower from just a few months ago. More importantly, the latest surge in margin loans follows an expansionary policy adopted by the monetary policy for the fiscal year 2024-25, which, among others, scrapped the Rs200-million margin-loan cap for institutional investors.

The Nepal Rastra Bank, the country’s central bank, tightened the margin-loan policy three years ago when the 2021-22 monetary policy limited margin loan per customer to Rs40 million at one bank and Rs120 million at multiple banks. Investor speculation was rampant back then. The Nepal Stock Exchange (NEPSE), the only stock exchange in the country, rallied from 1,099 in March 2019 to 3,227 in August 2021, before tumbling 44 percent to 1,807 by June 2022. Fast forward to now, and the NEPSE closed at 2,568 on July 25, the session before the latest monetary policy was announced. By August 18, it hit 3,048 and reversed lower, touching 2,443 on September 29. The index closed at 2,618 on Sunday.

Bishnu Poudel, the current Finance Minister, has an enviable reputation for stock-market performance during his prior three stints, with the NEPSE up 69 percent between November 4, 2015 and August 1, 2016, up 82 percent between October 13, 2020 and July 12, 2021 and up 8 percent between December 22, 2022 and February 27, 2023. It seems he earnestly wants this unbroken streak to continue as his legacy. Poudel began his fourth stint as finance minister on July 15; a day ago, the NEPSE closed at 2,258. On September 18, he showed up unannounced at NEPSE headquarters, apparently seeking answers for the drop in the index from north of 3,000 to north of 2,500 within a month!

Yes to long-term focus; no to gimmicks

If this conduct by a finance minister looks like cheap populism, it is exactly that. First, the NEPSE management wields no control over the direction of the index. It is instead dictated by the buy and sell orders of bullish and bearish investors/traders, who, for the most part, are, and should be, driven by the economy’s prospects, thereby company earnings—or a lack thereof. Second, news of Poudel’s appointment as finance minister had raised investor hopes that there would be prompt improvement on the regulatory front, including the appointment of chairman of the Securities Board of Nepal, which regulates the securities market in Nepal; the post has remained vacant since January this year.

If Poudel’s visit to the NEPSE trading floor was a ploy to message the embittered investors that he is on the case and has their back, this can only be considered immature. A finance minister cannot be this preoccupied with an equity index, which has its own rhythms and tends to move in cycles—near- to, medium- to long-term. It is not rocket science, but securities—be it fixed income, currency, equities, or what have you—do not always go up. They cannot possibly. Poudel is a politician. Politicians—most anyway—have their eyes on the next election cycle. Hence they miss no opportunity to please voters, but it is responsible to follow the proper do’s and don’ts.

As finance minister, Poudel will do himself a big favour if he focuses more on the long term and less on gimmicks. This is what will ensure him an enduring legacy. The NEPSE, having opened for trading in January 1994, is relatively young. Its market cap has gone from millions to trillions in three decades, yet it lacks even the most basic investing tools. Forget derivatives such as options and futures, which are not traded there, it is still not possible to short a NEPSE-listed stock. In shorting, borrowed shares are sold, hoping to buy them back later at a lower price. This involves an entirely different skill set and should lead to a balanced market, as in any given asset sometimes bulls are right, sometimes shorts.

Stocks go up, and they go down

It is unhealthy to only wish for upward bias. Unfortunately for Nepal’s stock market, that is the case, as, for instance, bears are denied an opportunity to butt heads with bulls. The problem gets exacerbated when regulators and concerned authorities such as Poudel routinely telegraph that they want higher prices, as was evident in his visit to the NEPSE headquarters. The recent change in margin-loan policy probably falls into the same bucket; the idea was to induce risk-on behaviour, and that happened. Here is the irony. The NEPSE jumped 34 percent from mid-July to mid-August and fell 14 percent the next month, even as borrowing took off. Those using leverage to go long are left holding the bag.

Tweaking policy with a desire to push prices up may yield results in the short term, but this hardly helps if the aim is to graduate from an emerging to developed market someday. The sad truth is that when markets are under pressure, the human tendency to play the blame game holds true in all markets. The US banned short selling of financial stocks in September 2008 when they were in freefall, but they kept falling. A similar thing happened in several European countries in August 2011. For two years now, Chinese authorities have rolled out measures designed to breathe new life into real estate and stocks, but the Shanghai Composite Index continues to trade materially lower from its prior highs.

Except for shorts, not a soul complains when an asset bubble is forming. But when markets are in crisis, they all get panicky, at times leading to absurd courses of action by the authorities. Developed markets can get away with this because they have gotten the scale—a go-to place for global investors. Emerging markets like Nepal are different. Here, as tempting as it is to wish for ever higher prices myopically, the solution does not lie there but rather in measures to lay the proper foundation, which, among others, is made up of as many tools as possible so that both bulls and bears get efficient. In the end, the more efficient the market, the less the need for government policy handouts.