IMPACT OF INTEREST RATE ON STOCK MARKET IN NEPAL

Abstract

The stock market index functions as an economic barometer. A climbing stock index generally signals investor optimism about the economy's future. Grasping the relationship between the stock market index and its influencing factors is essential. The stock market is influenced by a number of variables, including the bank rate, deposit interest rate, lending interest rate, and short-term risk-free interest rate. Investing in efficient markets is the goal of astute investors. A small number of people may make significant gains in inefficient markets, which would undermine investor trust overall. For example, a rise in interest rates on bank deposits may induce investors to transfer their funds from the stock market to banks, hence reducing share demand and prices. In a similar vein, higher interest rates on bank deposits may result in higher interest rates on loans, which would decrease total economic investment and, ultimately, share prices. Therefore, pricing theory suggests that share prices and interest rates have an inverse connection. The purpose of this study is to look at how interest rates affect the stock market. The particular goals are to analyze how bank rates affect stock market returns, comprehend investor behavior with respect to share investments, compare stock market returns to short-term risk-free interest rates, and determine how deposit and lending interest rates affect Nepal's stock market.. A significant and inverse relationship between interest rates and the stock market has been observed in the majority of earlier research. To look into this link, some have looked at deposit interest rates while others have concentrated on T-bill rates. This study establishes the relationship between interest rates and share prices using four independent variables. In order to ascertain if the findings are in line with previous research, the study investigates these implications within the framework of Nepal.