Financial markets: Stocks stable albeit conducive conditions

Thursday, October 20th, 2011 7:57:50 by

Amid depreciation in the Pakistan Rupee against the US Dollar, stocks have shown a steady trend in October.

The exchange rate shows how much one currency is currently worth in terms of the other. If the value of the local currency increases in terms of the foreign currency, the local currency is said to be depreciated.

Theoretically, depreciation in exchange rate enables the foreign buyers to buy more of local goods. For example, if initially, one dollar is worth 80 rupees, and one share of company XYZ costs rs.80, a foreign investor can buy one share of the company for one dollar.

However, if the rupee depreciates to rs.90, the investor will be in a position to buy more than one share of the company for a single dollar. Hence, it can be deduced that steady depreciation will usually attract foreign investment.

However, if the depreciation is rapid, it will hurt the foreign investor and will result in a net outflow of foreign investment. Although depreciation in the rupee has not been rapid, economic instability and worsening law and order situation has forced investors to withdraw money from the stock markets.

The State Bank of Pakistan slashed the discount rate by 150 basis points on Saturday, October 8 in a bid to attract investment in the financial markets, but there has been no significant impact thus far. The KSE-100 index gained 392 points in the first trading session after the announcement on Monday, October 10, but shed 114 points in the next session.

All indicators are favourable for investment in financial securities, but growing energy crisis and deteriorating economic condition has compelled the investors to divest from the market.

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