The Central Bank’s (CB) penal rate cuts during the past three months has boosted the stock-market, according to some analysts but others say these rates need to reduce further to see some ‘material’ impact in the market.
The penal rate is a rate charged to primary dealers and commercial banks who exceed the limit of 3 times per calendar month for borrowings from the CB at the reverse repurchase (discount) rate of 12%. CB reduced its penal rate by 175 basis points to 14.75 on Wednesday.
“This was done to reduce the cost of borrowing which means adding more liquidity in to the market. This way the market participants can borrow money – especially if they are doing margin trading, the investors can borrow funds to buy shares,” Amal Fernando, acting CEO HNB Securities told The Sunday Times FT.
He also noted that the impact of the rate cut however will not be felt immediately but be seen in the medium term.
Some analysts say that these rate reductions are already impacting the stock market. “The substantial interest rate cuts by the Central Bank during the past three months and the improved retail activity seen over the last few days will sustain improved indices," Thakshila Hulangamuwa, Vice President Business Development at Asha Phillip Securities said.
Another analyst noted that these rate cuts by the CB are a good beginning but they have to reduce some more in order to see a ‘material’ impact in the share market. “This rate cut is still academic.
It needs to see a material reduction to see a real difference,” he said. CB cut the rate by 200 basis points to 17% in January.
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