Policy review sets the stage for market resurgence

Following the Nepal Rastra Bank’s (NRB) recent decision to relax its stringent policy on share mortgage loans, the stock market is showing early signs of a positive trend.

In its first quarter review of monetary policy released on Friday, the central monetary authority reduced the risk weight of realty and shared mortgage loans from 150 percent to 125 percent. This provision alone will increase the bank’s capacity to extend an additional Rs 40-50bn toward the sector, market analysts say.

This policy shift appears to have had an immediate impact, as the next trading session on Sunday witnessed an early closure due to the activation of a positive circuit breaker—a development not seen in more than two years.  Nepal Stock Exchange (Nepse) gained 111.2 points, or six percent,  in just nine minutes of trading. Stocks worth Rs Rs 482.4m changed hands during those minutes. Although the market witnessed some correction the next day, losing 15.4 points, daily turnover hit a five-month high of Rs 4.82bn. On Wednesday, the benchmark index posted a nominal gain of 2.6 points while daily turnover reached Rs 3.90bn.

The monetary policy review has injected a renewed sense of optimism among investors who had experienced a prolonged downturn, marked by a continuous decline in the benchmark Nepse index over the last 28 months. Investor confidence had waned, prompting calls for the central bank to reassess its policies. The recent positive market atmosphere is now seen as a potential morale booster for investors.

Simultaneously, the central bank’s reduction in the policy rate will contribute to a decline in overall interest rates in the coming days. The correlation between interest rates and stock market performance is well-established. With banks expected to announce a decline in interest rates, the stock market is expected to witness a further boost in the coming months.

Investors say that the central bank’s policies play a pivotal role in shaping market dynamics, as factors such as interest rates, monetary policy, inflation, and more directly affect the market. Additionally, external elements such as political events, financial reports of listed companies, and the psychology of investors collectively contribute to the overall market sentiment.

The observed decrease in interest rates, coupled with the relaxation of stringent policies by the central bank, has led to a notable increase in investor sentiment—a positive sign for the capital market. The surge in daily turnover further indicates the return of institutional investors who had exited the market during the bearish phase. Recent trading sessions have recorded an average daily turnover of more than Rs 4bn, showcasing a revitalized interest in the market. These developments signify a potential turning point for the Nepali investors.