Impact of Inflation and Interest Rates on NEPSE Valuation

The Nepal Stock Exchange (NEPSE), like every other capital market, is deeply influenced by macroeconomic variables — and two of the most crucial among them are inflation and interest rates. These indicators directly affect company earnings, investor sentiment, and overall stock market valuation. Understanding their relationship is essential for every trader and investor aiming to make informed long-term investment decisions in Nepal’s dynamic financial environment.

When inflation rises, the purchasing power of consumers declines, leading to reduced demand for goods and services. This affects corporate profitability and investor confidence. In such periods, companies face higher input costs — raw materials, labor, and transportation expenses — which reduce their profit margins. High inflation also leads to increased operational costs for banks and financial institutions, squeezing their lending spreads. As a result, investors tend to shift funds from equity to safer assets such as fixed deposits and government bonds, leading to market corrections or bearish sentiment in NEPSE.

On the other hand, interest rates — largely determined by Nepal Rastra Bank’s (NRB) monetary policy — directly affect the liquidity and valuation of listed companies. When NRB raises policy rates or tightens liquidity to control inflation, borrowing becomes expensive for both companies and investors. This causes a decline in business expansion and investment appetite, which in turn lowers NEPSE valuations. Conversely, when interest rates fall, cheaper loans increase corporate profits, encourage margin lending, and inject liquidity into the market — typically resulting in bullish trends in NEPSE indices.

From a valuation perspective, both inflation and interest rates influence the discount rate used in equity valuation models. High interest rates increase the discount rate, thereby lowering the present value of future earnings, leading to lower price-to-earnings (P/E) multiples and weaker stock prices. Similarly, during low inflation and easy credit periods, the market tends to assign higher P/E ratios, as future earnings appear more valuable. This is why NEPSE often performs strongly during periods of stable inflation and accommodative monetary policy.

Furthermore, sectoral effects vary significantly. Banks and insurers benefit from higher interest spreads during moderate inflation, while hydropower and manufacturing companies struggle due to rising production costs. Real estate and infrastructure-related stocks tend to perform better in low-interest-rate environments due to cheaper financing.

According to Sandeep Kumar Chaudhary, Nepal’s leading Technical and Fundamental Analyst and founder of the NepseTrading Training Institute, “Inflation and interest rates are like the heartbeat of the market — they define how fast or slow capital flows through NEPSE. A disciplined investor studies these indicators before every major decision.”With over 15 years of banking experience and 10,000+ trained investors, he emphasizes that successful investing requires combining macroeconomic understanding with technical timing, especially in a developing economy like Nepal.