It is true that interest rate hike is not a good news for stock market at any time. Now interest rates are going up continuously which shows the economic instability clearly due the lack of funds available in the local and also deteriorating reserves at central bank.
The system of interest rate hike is going other side when comparing developed countries. There they increase the rate to increase the inflation. When they see the possibility of deflation they never increase also think about reducing furthermore to allow the money to flow effectively in the local economy.
But in Srilanka , interest rate hike is going upside down due th many reasons.
1) previous government's projects with no return. Such as property investment happened in Spain in a big scale.
2) too much debt for the country. So central bank have no option.
3) too much corruption and very hard to recover stolen funds from politicians like a tradition.
4) no investor confidence and SGT was a wrong idea and unacceptable. See CTC has affected very very badly specially its NAV.
5) unable to cut down imports and increase exports
6) unable to maintain the purchasing power of rupees. Normally it is good to bring down the currency to bring foreign investment , increase in exports and cut down of imports. But instability of rupees continuously make everyone stay away to avoid losses for just brining the funds into the country.
7) Srilanka economic market is very small and when comparing devaluation of rupees is too much. We can't expect too much foreign funds into the small economic market and we are still struggling.
central bank's reserves are deteriorating and make everyone anxious about default. Eg - Greek Crisis.
Manymore reasons to write..
My opinion to improve
1) must privatise any loss making enterprises without affecting the national security.
2) must bring quick and serious judgement for those who involved corruption with the help of international to bring the country corruption free and confidence.
3) should stop any projects which are not going to give us short or medium term until economic conditions improve.
4) there are lots of corruption involved in the export and it should be tackled.
5) must bring tight law to cut down imports without any questions. See all parliamentarians want tax free permits to import vehicles. Very bad example to the nation and very selfish.
7) government should go for low interest loan to pay off higher interest loan taken by the previous government. There was a massive fraud and commission earned illegally from previous government.
must lease some of its land or properties to foreign investment and must not sell free hold. They had been sold free hold many times.
9) if they can try atleast there will be a improvement then we can go next step....
If they don't improve
1) most investors will exit in the stock market regardless of any performance of companies. Imagine what will happen if there is a real problem in the country's economy???? I don't want to say that.... Example- Greek stock market.
2) most investors will move their wealth to safer investment due to the rate hike of interest and walk away stock market. If this happens, there will be difficult to sell our stock like now due to the lack of buyers. Then think what will happen?????
3) even investment in the financial system is also involved risk if there is a economic crisis. Also their guarantee for deposits are very low. So most people will move for safe haven investment.
4) most people don't understand that the stock market is the back bone of the country's economy. Also stock market is showing the healthy of any country's economy. Most people think that stock market is like horse race or casino in the gambling.
That is the reason the stock market is affected all the times if there is any news locally or internationally because it the back bone of the country's economy. in other way that stock market is the victim of country's economy because it is representing the country's economy.
As JAYATHU said,
Interest rate hike is like a cancer for country like Srilanka whether you accept it or not. The death is confirmed but don't know when.