ECB easing a mixed blessing for India

The massive, bigger than anticipated, €1.1-trillion bond buying programme announced by the European Central Bank (ECB) last week to increase liquidity and lift growth envisages central banks buying assets from financial institutions to the tune of  €60 billion per month from March this year till at least September 2016.

By then, it is hoped that the injection of easy money into member economies in the form of liberal loans to households and businesses will revive investment, lift inflation to acceptable levels, facilitate the return of tourists, and bring the roar back to EU export powerhouses like Germany on the back of a sharp fall in the euro.

This could be a mixed blessing for India. On the one hand, there’s scope for rupee appreciation since some of this easy money is expected to be invested in emerging market assets, in the hope of higher returns. This could, in turn, help Indian corporates who are finding it difficult to service their external commercial borrowings.

It is understood that the inability of corporates to service their external debt has adversely affected the bank asset quality in India. But it remains to be seen how this would play out, given that the US Fed is expected to raise its interest rates later this year. Also with the recent 25 bps cut in repo rates, the Reserve Bank of India has signalled its downward bias on interest rates. On the other hand, a rupee appreciation against the euro could also make our exports uncompetitive to the eurozone as well as the European Union.

At present, the EU bloc is India’s second largest trading partner after the Gulf Cooperation Council countries. In the last financial year, bilateral trade numbers stood at $101 billion-plus, with the balance of trade slightly to India’s advantage. There are, however, sceptics who feel that euro depreciation could stall if the US economy were to trip and the Fed delays the anticipated rate hike, thereby bringing down the dollar.

The implications for the eurozone and EU of the coming into power of the far-left Syriza government led by Prime Minister Alexis Tsipras, which was voted to power riding on promises to overturn the austerity measures imposed as part of the country’s €245-billion bailout, are also not fully understood. With favourable crude oil prices, benign inflation, and promises of more rate cuts, the Indian economy is awaiting the blueprint for investment revival from the forthcoming budget. But the anticipated headwinds from ECB’s easy money policy drive home the need for prudent monitoring and stewardship of the economy by our policy makers.