Nepal's stock market has seen a significant drop, with the NEPSE index falling below 2,500 points, currently sitting at 2,470.39 as of today i.e. 24 September 2024. This sharp decline has raised concerns among investors, especially after the initial optimism when Finance Minister Bishnu Prasad Paudel took office in July. Despite favorable policies and political alignment between the Nepal Rastra Bank(NRB) and the Finance Ministry, the market has been struggling. Let's break down the main reasons behind this fall and understand the factors influencing Nepal's stock market decline.

1. Banking Sector Liquidity Problems

While Nepal's banks have a lot of liquidity (cash to lend), they're not putting this money to work effectively. Either businesses are reluctant to borrow due to economic uncertainties, or banks are being too cautious. This means the funds that should be boosting the economy are sitting idle. Recently, the Nepal Rastra Bank has tried to improve the situation by withdrawing Rs. 30 billion from the banking system to ease liquidity pressure, but it hasn't been enough. Since banks make up a large part of the stock market, their struggles are reflected in falling stock prices, contributing to the broader Nepal stock market crash​.

2. Ineffective Monetary Policies

The central bank has introduced policies aimed at stimulating the economy, such as allowing investors to use their stock market shares as loan collateral. While this should encourage borrowing, it hasn't solved deeper problems like a lack of profitable businesses or projects to invest in. Key sectors like finance and hydropower, which rely heavily on such policies, have experienced significant drops in their stock prices, driving the overall NEPSE index decline​.

3. Falling Investor Confidence

When Finance Minister Paudel took over, investors were initially excited, pushing the NEPSE index close to 3,000 points. However, as time went on and no major economic improvements materialized, investor confidence began to wane. This loss of confidence is crucial because when investors feel uncertain about the future, they pull back their money, causing a drop in stock prices. This shift in sentiment has been a major factor in the market’s current downward trend​.

Source: NEPSE Alpha Technical Chart

4. Local and Global Economic Pressures

Nepal is dealing with both domestic and international economic challenges. Locally, rising inflation and a slow recovery in vital sectors like tourism have put pressure on the economy. Globally, economic uncertainties, such as rising oil prices or downturns in countries that trade with Nepal, have also had a negative impact. This has made businesses struggle, further contributing to the fall in stock prices. These combined factors are weighing down on the overall Nepal economy and its stock market​.

Conclusion

The recent Nepal stock market drop is the result of multiple factors: sluggish banking activity, ineffective monetary policies, declining investor confidence, and both domestic and global economic pressures. While the government has expressed concern and is looking for solutions, it will take more time and significant policy changes to restore investor trust and stabilize the market. Addressing these core issues will be key to reversing the current trend and reviving Nepal’s stock market performance.

This analysis highlights the need for ongoing efforts to stimulate economic activity, build confidence, and ensure that favorable policies truly benefit the broader economy.