DIKSHYA SINGH
KATHMANDU: Despite the lowered short run interest rates, the capital market has not seen investments flowing in from the money market due to the inefficient market conditions.
Government issued short-term debt instruments such as treasury bills (TB) have reached a historical low in recent months as financial institutions are short of viable projects to finance. Since November 2011, 91 days TB are being traded at less than one per cent interest rate. There are 28 days, 91 days and 365 days TBs based on their maturity among which 91 days TB are the most traded in Nepal.
When the TB’s interest was the highest in January 2010, the stock market’s benchmark index stood at 468 points but now when TB rates are super low, the stock index is lower. As per financial market rules, the lowered interest rate is supposed to push stock prices up.
However, in Nepal, like most economic theories, this too has failed. “Here economic fundamentals do not work due to inefficient market conditions as opposed to in developed economies,” pointed out director of Nepal Rastra Bank’s Public Debt Management Department Dr Gopal Bhatta.
It is believed that when the yield on bonds is low, investors opt for equity investments in expectation of higher returns. A low yield on bond signals a lower interest rate which leads to credit expansion.
More credit is always beneficial for economic activities that will eventually generate more profit for corporations and share holders get better returns on their investment. “However, in our case, a lowered interest rate due to comfortable liquidity in the financial system has not translated into credit expansion which is the missing link in the chain, as banks are happy to earn profits by investing in low yielding but safe government bonds,” he explained, adding, “Here, the interest rate has not gone down despite enough liquidity. It is difficult to fathom the movement of the stock market in reaction to lower interest rate of TB”.
The presence of institutional investors such as mutual funds can bridge the gap between money and capital market. The professionally managed funds’ portfolio will contain government issued bonds, corporate debentures as well as equities.
“The operation of mutual funds might be successful in establishing a relationship between short-term interest rate and equities’ yield as the fund managers will allocate the portfolio in instruments that will generate maximum returns,” said Dr Bhatta. Here buyers of bonds and shares are mutually exclusive as government debt instruments are absorbed by financial institutions and institutional savers while shares are an exclusive domain of retail investors.
In the United States, Federal Reserve has decided to keep the interest rates low at almost zero till 2014 in order to boost economic activities and prevent the stock prices from falling. The lowered interest rate is expected to boost the economy at both the ‘Main Street’ and ‘Wall Street’. Low interest encourages borrowing by enterprises, thus increasing employment. In addition, it will also help avoid any crash in the capital market. Hial.
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