Opinion Trillion dollar baby
European quantitative easing programme could be a boon for India. But there’s no room for complacency
In a last ditch attempt to rescue the Eurozone from a deflationary spiral — inflation was minus 0.2 per cent in December and the unemployment rate is 11.5 per cent — the European Central Bank (ECB) announced an open-ended government bond buying programme. Mario Draghi, president of the ECB, announced on Thursday that it would buy 60 billion euros of bonds each month until September 2016. But crucially, Draghi added that the programme would remain in place “until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2 per cent”.
Draghi’s public commitment to near-2 per cent inflation is an important signal and might go some way in breaking deflationary expectations. In the coming days, the euro is likely to weaken — this is a good thing for exports and spurring inflation — and sovereign bond yields will fall further leading to an adjustment of financial portfolios towards more risky assets. Greece, whose yields have, in fact, risen due to political uncertainty, and which goes to the polls on Sunday, is the exception.
While the programme is bigger than expected and must have taken some nimble negotiation, the ECB’s announcement seems a few months too late. It is also complicated by involved risk-sharing across the national central banks of the Eurozone and the reliance of European firms on bank finance, rather than capital markets. While better late than never, its success compared to QE programmes in the US and the UK remains to be seen.
But Draghi’s announcement could be a boon for the Narendra Modi government. While the UPA had to contend with high inflation and external vulnerability due to the imminent tapering of the US Federal Reserve’s QE programme, the NDA has been lucky with global oil and commodity prices and their effect on moderating inflation. And now, with the ECB’s QE programme effectively neutralising the Fed’s bond-buying wind-down, it holds out the assurance of continuing comfortable global liquidity and money streaming into Indian capital markets. This is not just because India is not a commodity exporter but also because it seems more comfortably placed, with brighter growth prospects than its emerging market peers. But there is no room for complacency. “Sentiment” may have returned to the market but the investment cycle has not yet restarted. All eyes are on the Union budget. The Centre must start by rationalising the subsidy regime and bringing the GST.
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