DDR worries overhang stock market sentiment

The Central Bank (CB) Monetary Board’s cut interest rates earlier this month with the market recovering for two days but resumed the general monotonic tone thereafter.

The regulator cut both SLFR (Standing Lending Facility Rate) and SDFR (Standing Deposit Facility Rate) to 13 per cent and 14 per cent, respectively, from 15.5  per cent and 16.5  per cent noting that lower interest rates are essential to restarting credit flows into the real economy, which was contracting since June last year.

Stock market analysts said that the domestic debt restructuring (DDR) is a big overhang in the sentiment for investors to go into the stock market. “There has to be clarity on DDR. Only then will money come into the stock market,” an analyst said.

Last Thursday saw the Treasury bill rates for 12 months coming down by 280 basis points, along with other monthly rates.

A stock broker said there is a possibility of the market recovering in the near term, but again highlighted on the clarity for DDR mechanism. “It has to happen without damaging the banks.”

An economist said despite the regulator’s rate cut, the prime lending rates subsided. This, he said, will not help the stock market recovery and in the April figures, the private sector has borrowed Rs. 7 trillion from the banks, whereas the central government has borrowed Rs. 8 trillion, which is a pre-emption of resources by the private sector. “The monetary policy should be translated to the financial system then felt by the people, which is called monetary transformation.”

He said “This has yet to happen with the monetary policy adjustment.”

The CB expects inflation to return to single-digit levels as early as July and the prices to be maintained at the desired mid-single digit levels thereafter.

A second economist said that after the SLFR was reduced to 14 per cent from the earlier 16.5 per cent, there is a big arbitraging opportunity for banks. “They will borrow at 14 per cent and lend to the government sector at 22 per cent.”


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