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Updated on: Jan 25, 2015

The ECB’s massive stimulus for the Eurozone should help them combat low growth and low inflation

The European Central Bank’s quantitative easing moves to fight deflation and revive economic growth are expected to help restore confidence and keep financial markets relatively calm. Global markets had suffered ‘taper’ tantrums almost 18 months earlier when the US Federal Reserve first hinted that it would begin to withdraw the stimulus (a similar attempt at quantitative easing done in three rounds) as a prelude to raising rates. Since then the spectre of a Fed rate hike and the consequential flight of money from emerging markets including India to safer havens has hung heavily over the financial markets. Now that the US economy is on the rebound, it is clear that the Fed rate hike will happen later this year.

The ECB’s decision to inject €1.1 trillion through buying sovereign debt spread over 18 months from March 2015 will ensure that the negative impact of the Fed rate hike, particularly the outflow of funds from emerging markets such as India, is offset to some extent. It provides the Reserve Bank of India with more room to stay with the monetary easing course that it began recently with a 25 bps cut in repo rates. Over the last year the RBI kept an eye out on the possible impact of a Fed rate hike and held off cutting rates despite domestic inflation trending lower. Now it can breathe a tad easier. Also, the prospect of lower rates and additional money coming into Indian equity markets, combined with positive sentiments of economic revival, should keep markets buoyant. This will be important in the context of the government’s disinvestment programme during the next fiscal as well as fundraising efforts for corporates for the next stage of investments in the economy.

Quantitative easing does not however mean automatic deliverance either for the beleaguered Eurozone or for other countries that have tried it earlier, whether the US, the UK or Japan. It has at best bought some time for the respective governments to set their economies in order, undertake fiscal reforms and make themselves more competitive. Meanwhile, countries such as India that may be recipients of flows during the period of these unconventional monetary policies must simultaneously strengthen themselves to handle future outflows. RBI Governor Raghuram Rajan drew attention last year to the need for greater sensitivity on the part of developed nations to the spillover effects of their monetary policies on other countries, particularly the emerging economies. But countries will continue to do what is in their interest and we are still a long way away from an environment in which central banks act in a coordinated manner and consider the impact of their policies elsewhere. But in an increasingly economically inter-dependant world, there is a case for adopting a larger vision and looking a little more closely at what is in the global interest.

Published on January 24, 2018

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