Nepal Stock Exchange (NEPSE) has not been able to perform  as expected this economic period. In fact, it has been facing a bearish trend for a long time, even vaulting below the 1,200 mark recently. Statistics show that this mark is the lowest in three years. And this has become a hot issue among investors, bankers, policy makers, the public, politicians and other stakeholders each of whom have a different explanation for this phenomena. Opposition leaders say it is the result of the financial ministry’s move on different tax and investment policies related to capital market. Hence, they blame the governement. However, the ruling party and the government maintain the fall is an outcome of the high interest rates on the market. Likewise, economists are stating that the low return on investment and hence faded public confidence in the stock market is increasing the supply and reducing the demand of stocks. While there are many who are stating that easy access to the online trading system is having a direct effect on this.

Of course, market interest rate, supply of money, confidence of the public, economic policies and many other—political, social, and economic—issues are the constituents that determine the performance of the stock market in any economy. However, we need to understand that they are inextricable. One cannot argue that any particular indicator has engendered the current fate of NEPSE.

Understanding NEPSE’s constituents

The current free fall is not a sole creation of either high interest rate in the market, as the government has cited, nor are the current economic policies of financial ministries to be blamed because these issues are not strong enough to bring down NEPSE to its current level in this short period. After scrutinising the trend of NEPSE, it becomes evident that shares had started falling a year ago, seeing many ups and downs.

According to the annual reports of NEPSE, the banking industry holds more than 60 percent of the market capitalisation, and among the top ten securities by market capitalisation, six are of commercial banks. Thus, it undoubtedly connotes that the performance of the banking sector has a direct and decisive effect on the capital market. Similarly, any policy that affects the banking industry does the same. Therefore, the policies and issues that have taken place during the last few years are the major causes of the current fate of Nepali capital market. One such policy is the monetary policy 2015/16. Ever since the Nepal Rastra Bank drafted the monetary policy 2015/16 and increased the requirement of paid up capital for banking institutions of all categories by four folds, the unnatural trend started to take place rapidly in the Nepali capital market. However, BFIs infested the capital market with an unnatural amount of stock and somehow they sold them to fulfil their requirements. For example, NEPSE statistics show that a number of listed shares for commercial banks alone increased by more than 120 percent during the last three years. However, their performance remained sluggish (according to the central bank statistics, their performance in terms of net profit increased only by 50-60 percent). And hence banks are increasing their portion of stock dividend rather than cash to persuade their investors in recent years. However, reduced share prices in the stock market have turned investors away from these stocks. The sub index for the banking industry, which was above 1600 marks during 2016 is now moving around 900 marks. The stocks of BFIs that were traded above Rs3000 per share during 2016 are now doing business below Rs600.

The actuality of things

Reduced money supply is another important factor. Since the economy has been facing liquidity problem for years, the interest rates are rising. Therefore, trying to correct interest rates by direct intervention without considering the supply of money is going to have a negative impact in the future. More specifically, the current statements from the central bank and the government regarding reducing the BFIs spread rate is directly going to affect the stock market in a negative way. Of course, a quick boost in the capital market for a very short period could be seen with this move; however, it will not last much longer. It is because considering the composition of the Nepali economy, BFIs performance is very elastic to their spread rate. More specifically, in the current situation, BFIs do not have the ability to compensate lost income due to a reduced interest rate by increasing lending volumes. This will further impair their performance and the direct and negative effect will be seen in NEPSE. Therefore, policy makers have to get out of their comfort zones and make policies that have long-term benefits rather than entangling with short-term policies. Likewise, since we cannot expect a drastic improvement on the performance of listed companies in the present context, policy makers have to focus on improving the market by creating economic activities in the nation rather than by issuing policies that the economy cannot handle.

Thus, what the current situation needs is a creation of investment opportunities for BFIs to increase their profit by increasing investment and not  interest rates, by reducing the foreign trade deficit by increasing the productivity of consumable goods in economy, and by utilising the remittances in the productive sector, and maintaining the supply of money in the market.

- Bist holds an MBA degree from  Uniglobe College.