Business Times

Drop in interest rates not drawing investors to the markets

Government’s move to reduce policy rates and Treasury bill (T-bills) rates may trigger a drop in interest rates offered by banks, but will not encourage investors to look at the share market for better returns, due to the uncertainty and volatility seen in the stocks, according to analysts.

Last month, the Central Bank (CB) cut 25 basis points from the Repo and the Reverse Repo (RR) rates. The Repo stands at 7.25% now from the earlier 7.5% while the RR is at 9.5% from 9.75% earlier. The 3-month T-bill rate has dropped to 7.54% from the 7.98% a month ago. The banking sector analysts predict that banks will drop their deposit rates soon, but stock analysts say that this will not prompt depositors to pull their money from such entities and invest in shares.

They noted that the share market seems to be tapering down now, but the instability created by recent rules imposed by market regulators has hindered investor enthusiasm. “The sharp appreciation in share prices is a major concern. If new money is to come in there should be some sense of confidence in the market. Talk of widespread manipulation which is followed by strong regulation does not show stability,” an analyst said.

He noted that this will be a strong reason why potential investors may not move their money from banks and financial institutions into the share market despite these entities enforcing an interest rate drop.
Some brokers said that the price bands may discourage retailers from leveraging on equities. “They are not getting as high and as quick returns as they may have been used to,” said Nikitha Tissera, Head of Research at Sampath Securities.

Milinda Ratnayake, Analyst SMB Securities noted that when interest rates drop money usually comes out of deposits to higher yielding investments, such as the shares, but the switch depends on how risk tolerant the investors is. “The senior citizens may just keep their money in safer deposits even if the interest rates are lower,” he added.

Brokers noted that if money comes in to the share market, it will maintain its upward momentum going forward, but the disparity between the fundamental value and market values could increase further, increasing the risk of a sharp correction in the future. “This will be less if the increase in corporate profits is sustained,” he added.

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