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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Sri Lanka' latest interest rates revision and it's effect on the Colombo Stock Exchange (CSE)

Sri Lanka' latest interest rates revision and it's effect on the Colombo Stock Exchange (CSE)

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
When the Central Bank of Sri Lanka is expected to bring interest rate cuts or increases, it is wise, as a stock investor, to be aware of  the potential effects behind such decisions. Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. Here's why.

A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. If we assume investors are rational, a decrease in interest rates will prompt investors to move money away from the bond market to the equity market. At the same time, businesses will enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices. Investors and economists alike view lower interest rates as catalysts for expansion.

Overall, the unifying effect of an interest rate cut is the psychological effect it has on investors and consumers; they see it as a benefit to personal and corporate borrowing, which in turn leads to greater profits and an expanding economy.

This will be a permanent thread on the Expert section for continuous update and discussion. Please feel free to contribute all new development and news relating to interest rates to this thread.

Academic


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Definitely this helps economic growth and hence the CSE in long-run. The short-run effect is whether savings come to equity market. Yes, once interest rates decline that money comes to equity market, since equity market is not attractive at the moment I doubts this would happen. Thus people may go for

1. Property market (mainly land and building)
2. Consume more as future earning prospects are good. IMHO, people save money, partly to stabilize their future earnings. Once economy started moving less risk and less savings.

duke


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
I've heard that savings ratio of Sri Lanka is already comparatively very low compared to other countries.

promode


Stock Trader
I heard CBSL says that they are trying to reduce the gap between lending and boorrowing rate. Which is now at 6 % and hope to bring down to 4%. I agree with Quibit with the idea that people will move away from bonds and security. And also from savings and FD's in banks. This money will ultimately used in
(1).equity markets
(2). Consuming goods and services (including land and property)

So we should be aware that out of both factors above, the Economy can be boost. Is Mr. Cabral expect only that to happen..???????NO, HE EXPECT THE GOVERNMENT TAX INCOME TO BE INCREASED..!!!!!!!!!!!!

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