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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Influence of stock market on inflation of SL

Influence of stock market on inflation of SL

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funland


Equity Analytic
Equity Analytic
In general, to stabilize the inflation rate, interest rates on deposits are increased to intake the money by central banks.Similarly, borrowing rates are increased to avoid people from having more money.

It is understood from this forum that foreign buying has increased significantly for the last few weeks. During this period, it is also learnt that selling behavior is expelled among local share holders. Theoretically, this causes local people(local share holders) to have more money.Does this mean stock market has indirectly fertilized to increase the inflation rate?

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
Last month, CBSL reduced inter-bank interest rates. The message is that the lack of economic growth is a bigger concern than inflation is.

Interest on bank deposits is also being brought down, making bank savings less attractive. Therefore, people are being encouraged to spend more, or look for other investment avenues - the stock market and real estate being potential alternatives.

If locals are pulling funds out of the stock market, it suggests that they are either spending more or investing in other assets. All this is positive for economic growth, but is not good news for inflation levels. In effect, the CBSL's objective of spurring growth is being accomplished...

This is just my opinion. Alternate views are welcome.

Gaja


Associate Director - Equity Analytics
Associate Director - Equity Analytics
Antonym,

Its true almost all the banks reduce their rates below 13% and most of them offering 12.% for one year deposits, but for the loans still the interest rates are same as what prevailed when the rate is 14 to 14.5%, i am referring the floating rates, i think CBSL 1st look in to this, because all the banks increase the loan rates even when there is a slight increase in the deposit rates.

Friends let me know if any of your banks reduce the lending rates within the last two months

Chanuque

Chanuque
Manager - Equity Analytics
Manager - Equity Analytics
Responding to @Funland, the equity market is one of the culprits of island inflation as we all have experienced stock market bubble ( Due to an excessive outstanding margin on speculative shares which is not supporting the fundamentals ). As an emerging economy, this is not so critical as yet ( There are so many other macro developments are underway ). Decreasing deposit interest, has to be done in order to encourage spending or investing. Borrowing interest has to be dealt very carefully and there should be a strict guideline to identify wrong hands and bogus projects. Only those who are having ability to perform repayments should encourage loans. The last thing Sri Lanka needed, is the finance bank bubble ..

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