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Share Market and Liquidity

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Share Market and Liquidity
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December 11: Lack or excess of investable fund in banking system is generally called liquidity problem. Liquidity problem arises with the imbalance of deposit collection and loan extension. When the growth rate of loan compare to deposit is low and absent of new investment sector in the market creates excess liquidity problem which also directly influence the share market.

Excess liquidity problem in BFIs arises due to the lack of favourable investment environment resulting low interest rate on loan extension. In such circumstance, share investors take loan from banking system and invest in share market. However, when the BFIs lack liquidity, they attract deposit by increasing deposit interest rate. In such situation, share investors sell their share ownerships and invest in bank deposits which take the share market downward.

At this point of time, it is rumoured that the market lacks liquidity. In the current FY, decreased growth rate of remittance flow, increased growth rate of import, minimal income from tourism sector have caused lack of liquidity in the market. As a result, the discount rate of government Treasury bill has increased. The discount rate which was less than 1 per cent during mid-August increased to 3 per cent during mid-November. However, on November 29, the discount rate of 91 days Treasury bill was 2.4999 per cent that shows of reduction in liquidity problem in the banking system.

Similarly, the BFIs have also increased the interest rate on deposits on the verge of liquidity problem.  Apparently, the share investors are getting attracted to increased interest rate of bank deposit which is a safe investment compare to share investment. Due to which, the market capitalisation which was Rs 2000 billion on September 5 has decreased to Rs 1718 billion on December 8.  Investors' lack of confidence in share market and attraction in secure investment has resulted in rise in bank deposits. The banks avoids margin lending in such condition however, such scenario of the security market is of temporary nature. 

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