Experts indicate that since the budget failed to boost confidence, the stock market now expects clear policy support from the central bank’s upcoming monetary policy.
Currently, the stock market is experiencing a severe shortage of institutional investors, which is highly concerning.
Contrary to hopes for increased activity following the formation of a new stable government, trading at the Nepal Stock Exchange has remained sluggish.
Fluctuations in NEPSE
Shortly after the general elections for the House of Representatives on Falgun 21, the NEPSE index saw a significant surge, increasing by 162.93 points to reach 2,875.
However, this growth could not be sustained for about three weeks until the government was formed under the leadership of Prime Minister Walendra Shah ‘Balen’ on Chaitra 13.
On Chaitra 15, the day the market reopened, the index plunged approximately 71.05 points to 2,879.11.
A year ago, NEPSE’s average daily trading amounted to 10–15 billion Nepalese rupees around the end of Ashad, whereas it has now dropped to an average of 4–5 billion rupees daily.
Looking back over the past two years, NEPSE reached a high of 3,000.81 on Shrawan 31, 2081 BS, and dropped to a low of 2,464 on Asoj 13.
What Are Market Expectations?
According to NEPSE’s Information Officer Murhari Parajuli, the stock market generally expects two main outcomes from the monetary policy.
“The primary hope is that loans are made available at lower interest rates, encouraging these funds to flow into stock investments. There is an inverse relationship between interest rates and the market; when rates drop, the market usually rises. However, despite reduced interest rates currently, the market has not responded accordingly. Balancing this is a challenging task,” he explained.
Stock Broker Association General Secretary Bhaktiram Ghimire believes the lack of institutional investors has weakened trust in the market.
“We are proposing several measures to address this via the upcoming monetary policy,” he stated.
“First, we want to open channels for channeling some of the excess liquidity held by banks into the stock market,” he added.
Image Credit: NRB
He noted that the central bank had imposed strict regulations recently: “Currently, banks can buy shares, but they must wait at least six months before selling them.”
Another major expectation concerns attracting bank investments in shares, Ghimire said.
“Just as banks are mandated to invest a certain percentage in underprivileged sectors or energy, similar provisions are necessary for stock investments. Currently, regulations allow banks to invest up to 40% of their core capital in shares. While other sectors have defined investment percentages, applying a core capital limit to the stock market is inappropriate,” he explained.
However, former Securities Board chairman and ex-chief of NEPSE Revat Bahadur Karki believes minimal interference from the central bank is preferable.
“Setting the 40% core capital limit is sufficient and, in my view, does not restrict investment,” Karki said.
Interest in ‘Margin Trading’
There is a consensus among experts that introducing the ‘margin trading’ facility, already popular abroad, could help revive Nepal’s sluggish stock market.
In simple terms, margin trading enables investors to expand their investments by borrowing from brokers.
“This means brokers obtain large loans from banks and provide retail financing to their clients. Investors contribute 30% of the investment, and the remaining amount is raised through bank loans, with brokers also investing some portion,” they explained.
Such loans are typically short-term, ranging from one or two months up to one year.
“For example, if a client deposits NPR 300,000 with a broker for margin trading, we allow them to trade shares up to NPR 1 million,” they elaborated.
Compared to banks, these loans are easier and faster to obtain, with brokers charging fixed service fees and slightly higher interest rates than banks.
Since margin trading was included in the directives issued in 2082 BS under the initiative of brokers and the Securities Board, five brokers currently offer this service.
“We hope the monetary policy will provide clarity to banks on this matter, bringing some dynamism to the market,” Ghimire said.
However, Revat Bahadur Karki advises against extensive central bank intervention in margin trading.
“This is primarily a relationship between brokers and investors,” he noted.
Budget Fails to Inspire Investor Confidence
The Rastriya Swatantra Party (Raswapa) had pledged during elections to make the capital market transparent, secure, and investor-friendly by introducing regulatory reforms, technology-friendly trading systems, and robust investor protection mechanisms.
However, the first budget brought forward by the Raswapa-led government failed to ignite enthusiasm in the NEPSE index.
According to Revat Bahadur Karki, the budget adopted some regressive policies regarding capital gains tax.
The capital gains tax on shares sold within one year was raised from 7.5% to 10%, and for shares held more than one year, the tax increased from 5% to 7.5%.
“When the leftist government had increased this tax earlier, revenue fell. Now, although the current government announced a reduction, it has instead raised the tax,” said Karki.
Likewise, Ghimire mentioned the budget did not sufficiently uplift investor morale.
Another reason for the stock market’s sluggishness is the government’s attitude towards private individuals, who still face a “detain first, listen later” approach.
“Wealthy individuals are linked to the stock market in various ways, and their wrongdoings need to be addressed. I believe financial crimes should incur financial penalties; imprisonment should be reserved for the gravest offenses,” he stated.
Despite interest rates being around 6%, the lack of investment is linked to weakened investor confidence.
Meanwhile, NEPSE’s Information Officer Murhari Parajuli sees expectations from the new government as not overly high.
“No government possesses a magic wand. The economy remains as it is, and expecting the market to surge instantly would be unrealistic,” he observed.
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