The People’s Bank of China has made a decisive cut in interest rate to arrest the free fall in the equity market.
Central bank’s move came after the Shanghai Composite Index recorded third day steep fall with stock prices coming down by 7.5% today. For the last three days, the SCI has lost 20.5%.
Always there is inverse relationship between stock prices and market rate of interest. Cutting the interest rate will make equities more attractive. This is what the PCB aims in its indirect way to support the market.
It is expected that interest rate cut will make bank loans cheaper and will provided adequate liquidity in the stock market. The rate cut may encourage investors to put their money in equities.
Regarding the crisis interventions, so far, China has made only subdued statements about the happenings in its stock market. The authorities who encouraged public to invest in shares have made only mild responses to avoid panic environment.
In the current move, China’s central bank also has not directly mentioned stock price crash as the reason for providing the rate cut.
The People’s Bank said that the interest rate cut was to reduce “the social cost of financing to promote and support the sustainable and healthy developments of the real economy”.
The PCB’s move has produced good impact on the day itself. In the US, the equity market has returned to positive trend.
How far it will bring back momentum in the domestic market in China can be seen only on Wednesday. It is hoped that at least the present wave of panic selling can be stopped.