Monetary Policy and its Impact on NEPSE

Monetary policy is a policy made by the central bank of a particular country to control the supply of money in the economy. Monetary policy plays a significant role to control inflation and deflation of the country. It helps to gain high economic growth with price stability.

Here, we discuss monetary policy and its impact on the overall economy. So, the monetary policy promotes economic activities by manipulating supplies of money and credit and by alerting interest rates. As well as, it plays a role in lending and borrowing rates of interest rates of the banks. Monetary policy can be either Contractionary Policy or Expansion Policy which are discussed below:

1. Contractionary Policy:

Central banks make policy that can reduce the money supply in the market is contractionary policy. When there is inflation this policy will adopt the central bank. This policy helps to avoid the distortion and deterioration of asset values.

2. Expansionary Policy:

To increase the money supply in the market central banks make expansionary policy. Deflation in the market suggests a central bank execute this policy. Normally, this policy executes in economic recession time, because increased money supply reduces interest rate which encourages the entrepreneur to invest which creates employment opportunities as well.

Price stability, economic growth, promoting priority sector, and encouragement for saving and investment are the major objectives of monetary policy. Furthermore, employment generation and interest stability take a vital roles in monetary policy.

Instruments of Monetary Policy

The instruments of monetary policy also called ‘weapons of monetary policy’. There are two types of instruments:

1. Quantitative Weapons:

Bank rate policy, open market operations, Cash Reserve Ratio(CRR), Statutory Liquidity Ratio (SLR), liquidity adjustment facility and marginal standing facility are the quantitative instruments used in monetary policy. Quantitative tools related to the volume of the money.

2. Qualitative Weapons:

Qualitative weapons also known as selective instruments. Regulation of margin requirements, credit rationing, moral suasion, and direct action are the qualitative tools of monetary policy.

So, monetary policy is a macroeconomics policy regulated by the central bank to control the supply of money, interest rate, consumption, growth, and liquidity. Every year central bank issues the monetary policy.

Effects of monetary policy on investment

Monetary policy highly affects people’s investments. The central banks might issue a contractive policy or expansionary policy as needed. When there is a recession in the economy central banks go for expansion to promote entrepreneurs, to create employment opportunities, and for economic growth. Lowering short-term interest rates, supply money in the market by buying short-term securities is the basic policy for expansion.

The monetary policy affects investment directly as well as indirectly. Direct impacts through fluctuate interest rates, however, indirectly through expectations about where inflation is headed. Monetary policy affects the price of equity, bonds, cash, real estate, commodities, currencies, and the stock market. Overall, monetary policy affects the entire economy of the country.

Impact of monetary policy on stock market performance

The primary objectives of the monetary policies are to boost the country’s economy, generate employment opportunities, and stable prices. The stock market plays a significant role in the country’s GDP. Although there will another body to monitor the stock market of a particular country, the monetary policy, directly and indirectly, impact the stock price performance of the country.

The financial institution will provide the loan to the investors. So, by contractionary policy or expansionary policy, they encourage the investor. Monetary policy and financial institutions both regulated by the central bank. So, by fluctuating in interest rate, repo rate. Cash reserve ratio, share loan percentage, and capital gain tax can monitor the market.

Monetary Policy in Nepal and its impacts

Every year Nepal Rastra Bank (NRB) issues the monetary policy at the end of the fiscal year. Monetary policy is crucial to managing aggregate demand. After the liberalization, Nepal Rastra Bank follows the indirect instruments such as cash reserve ratio, open market operation, and bank rate.

Last year’s monetary policy help NEPSE to reach the all-time high index. After the announcement of monetary policy, NEPSE was at the circuit level and made the first circuit at 11.06 AM. Last year, the monetary policy helps investors to take loans at lower interest rates. Also, they facilitate investors to take 70% of share loans. As well as they increase the Cash reserve ratio and allowed banks to invest 85% of their deposit. Those kinds of steps help the NEPSE index to take an upward trend.

Waiting for 2021/22 Monetary policy!

Last year after monetary policy published the stock market of Nepal took the bullish trend. The Corona pandemic hit Nepal’s economy so badly, so, Central bank and Finance Ministry announces various packages to sustain the country’s economy. Currently, still Nepal is suffering from Corona and the economic sector is risky. So, the coming monetary policy will help the investor.

Currently, the Nepalese Stock Exchange (NEPSE) Index is around 3000 and the daily transaction is more than Rs 13 Arba. Except for the share market, other economic sectors are shut down. So, many investors invest their amount for short-term trading. They want to book profit in a limited time and exit from the market. This is the major reason for share cornering and insider information is highly established in Nepal.

There are many companies that do not sound financial performance are have more market price than the actual good company. Likewise, many companies and big investors cornering the share to trap the new investors. So, Nepal Rastra Bank will publish the monetary policy which can encourage long-term trading.

In Ashad month, NRB publishes their monetary policy and it impacts in market positively and negatively according to policy content. As per current information, the central bank will publish the monetary policy which will more encourage long-term investors.

Recently, according to the NRB circular, the investor who sells their share within 1 year will pay 7.5% of capital gain, however, an investor who sells after 1 year needs to pay 5% of capital gain. So, Finance Ministry and `central bank want to promote the stock market on a long-run basis.

Conclusion

Monetary policy plays an important role to grow the country’s economy. It promotes price stability by managing inflation and deflation of the country. In Nepal, Nepal Rastra Bank publishes the monetary policy. All the circular and regulations of NRB will affect NEPSE performance directly and indirectly.

Now, many stock investors in Nepal are waiting for the monetary policy. Corona Pandemic also helps NEPSE to make the records of index and transaction amount. So, the central bank will think about the current market scenario and the future as well. There are many investors who are saying that the coming monetary policy will contract the stock market, however, some think the expansionary monetary policy will come.

FAQs on Monetary Policy and its Impact on NEPSE

  1. What is monetary policy?

    Monetary policy is a policy made by the central bank of a particular country to control the supply of money in the economy. Monetary policy plays a significant role to control inflation and deflation of the country. It helps to gain high economic growth with price stability.

  2. What are the main objectives of monetary policy?

    Price stability, economic growth, promoting priority sector, and encouragement for saving and investment are the main objectives of monetary policy.

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