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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » WHAT IS THE CONNETION BETWEEN BANK INTEREST RATES AND THE FOREIGN INVESTMENTS ( BRIEF EXPLAINATION)

WHAT IS THE CONNETION BETWEEN BANK INTEREST RATES AND THE FOREIGN INVESTMENTS ( BRIEF EXPLAINATION)

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kalu_mahaththaya


Equity Analytic
Equity Analytic
BANK INTEREST RATES AND THE CENTRAL BANK POLICY RATES (SDFR AND SLFR) TO CONTROL THE INFLATION. BANK INTEREST RATES ARE ANOTHER TOOL FOR THE SAME PURPOSE (MONETORY POLICY - OTHER TOOL IS STATUTORY RESERVE RATIO).

AT THIS MOMENT, THE CENTRAL BANK HAS INCREASED THEIR POLICY RATES TO ABSORB THE EXCESS LIQUIDITY FROM THE ECONOMY TO CONTROL THE DEPRECIATION OF RUPEE AGAINST US DOLLAR.

FOREIGN INVESTMENTS ARE CONCERNED ON TWO ECONOMICAL FACTORS.

1. PRICES OF SHARES
2. EXCHANGE RATES

WHEN THE BANK INTEREST RATES ARE HIGH PEOPLE TENDS INVEST IN BANK DEPOSITS RATHER INVEST IN STOCKS. THEREFORE THEY SELL SHARES AND SHARE PRICES GO DOWN.

THIS IS THE TIME FOREIGN INVESTORS COME TO THE MARKET. THEIR EXPECTATION ARE TO BUY SHARE AT THEIR LOWES PRICE IN HIGHER EXCHANGE RATES (THEY GAIN MORE RUPEES FOR DOLLARS). WHEN THE ECONOMY BECOMES STABLE THE RUPEE BECOMES APPRECIATED AGAINST DOLLAR.

AT THIS TIME, BANKS DECREASE THEIR INTEREST RATES AND CENTRAL BANK REDUCE THEIR POLICY RATES ( THIS IS NOT A SINGLE EVENT BUT CHAIN OF INCIDENTS BUT HERE, I EXPLAIN WHAT NEED FOR LOCAL INVESTORS) THIS WILL DISCOURAGE PEOPLE TO KEEP DEPOSITS AND ENCOURAGE TO BORROW FROM BANKS.

NOW, THE LOCAL INVESTORS COME TO THE MARKET AND START PURCHASING SHARES.

WHEN WE CONSIDER THE SHARE QUANTITIES IN THE MARKET, MOST OF VALUABLE " FREE FLOAT SHARES "ARE ABSORBED BY FOREIGN INVESTORS AT THAT POINT. WHEN LOCAL INVESTORS COME AND PURCHASE THE SHARES, THE PRICES OF SHARES INCREASING RAPIDLY DUE TO LACK OF AVAILABLE SHARES IN THE FREE FLOAT.

AT THAT POINT FOREIGN INVESTORS TENDS TO SELL THEIR SHARES. THEIR OBJECTIVE IS TO GAIN HIGH PROFITS FOR THEIR INVESTMENTS AND GAIN MORE DOLLORS IN ITS EXCHANGE.

THE SHARE PRICES OF BLUE CHIPS AT THE ECONOMIC BOOMING PERIOD AND THE LAGGING PERIOD MAY NOT HAVE MUCH DIFFERENCE..BUT FOREING INVESTORS GAIN  PROFIT AT THE CURRENCY EXCHANGE. THIS THING CAN NOT BE APPLIED FOR LOCAL INVESTORS BECAUSE THEY COULD ONLY GAIN A PROFIT WHEN PRICES OF SHARES ARE GOING UP. THEREFORE, HIGHER FOREIGN INVESTMENTS MAY NOT GIVE HIGHER RETURNS FOR LOCAL INESTORS.

I THIS JUST A SIMPLE EXPLAINATION TO SHOW THE CONNECTION BETWEEN SHARE PRICES, INTEREST RATES AND INVESTMENTS. THERE ARE MANY MORE MICRO AND MACRO FACTORS WHICH INFLUENCE THE INCREASING AND DECREASING OF SHARE PRICES. BUT THIS MAY GIVE YOU A LITTLE HELP TO CALCULATE THE POSITIION WHEN YOU TEND TO PURCHASE OR SELL SHARES...

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