Wednesday, January 9, 2013

‘Bank interest rates to decline’

H.D.H Senewiratne

There is a possibility that Sri Lanka’s bank interest rates would come down to stable levels in the future, which would intern attract the capital market, due to the good valuation of certain good stocks in the Colombo Stock Market (CSE), Chief Executive Officer, Capital Alliance Securities, Harinlal Athurupahana said.

“At present foreign investors were very active in the Colombo Stock Exchange (CSE) than local investors. The reason being local investors were inactive in the stock market due to high banking interest rates, which gives a better yield than invest in stocks, being the prime reason,” Athurupahana told Daily News Business.

The Central Bank of Sri Lanka lowered its policy rate. This resulted in the Colombo Stock Exchange showing significant gains due to the high attractions.

Last December 12, the policy rates were lowered and this resulted in the All Share Price Index (ASPI) increasing by 98.9 points (1.8%) from 5,417.7 points to 5,516.6 points.

Concerning interest rates, most people pay attention to invest in banks due to the high interest which could make an impact on the stock market.

It is said that by increasing interest rates, the Central Bank attempts to lower the supply of money by making it more expensive to obtain.

‘When the Central Bank increases interest rates, it does not have an immediate impact on the stock market. Instead, the increased interest rates have a single direct effect,” Athurupahana said.

The fact is that it was more expensive for banks to borrow money from the Central Bank. Increase in interest rates also cause a ripple effect, which influences both individuals and businesses negatively.

The general effect is a lessening of the amount of money in circulation, which works to keep inflation low.

When interest rates becomes high, borrowing money was more expensive, which affects the consumers and businesses expenditure.

This increases expenses of companies, lowering earnings somewhat for those with debts to pay. Finally, it tends to make the stock market a slightly less attractive place for investments, the Central Bank said.

“One could never say with confidence, that an interest rate hike by the Central Bank would have an overall negative effect on stock prices,” Athurupahana said.

Lanka Securities (Pvt) Limited, Head of Sales and Marketing, Eardley Kern said that the interest factor had a direct impact on our capital market development.

If the interest could come down, the share market would have an upward trend.

“If interest rates are low, the companies could borrow or raise loans at a lower interest, which would cut down the cost of production, while the people will go for other alternative investments, which would give a higher yield,” he said.

At present, the Central Bank making every effort to reduce the bank interest rates to control the fiscal policy stability, he said.

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