Opinion Easing up

The European Central Bank has cut its benchmark interest rates and introduced stimulus measures amid a rapid decline in inflation and manufacturing output. The ECB president has also stated that the Bank would begin purchasing private financial sector assets in October. In a further attempt to stimulate economic activity, it also cut its deposit rate, which was already negative, to minus 0.2 per cent. These largely unexpected moves have ramifications for the global economy, and for India.

Globally, they reinforce the trend of central banks pursuing loose monetary policies in order to spur investment and consumption, to boost growth. The United States Federal Bank and the Bank of England have both been pursuing far more aggressive stimulus measures, including quantitative easing. Though the ECB’s latest moves are still not as aggressive, they align its policy stance with that of other major financial markets. Such measures signify that central banks will continue to adopt policies to promote investments and increase liquidity in the markets. For the eurozone, however, the ECB’s moves need to be complemented with reforms within member countries. The Bank has reduced lending and deposit rates to all-time lows, and the onus is now on member nations to take the required corrective measures.

Advertisement

India should benefit from this move, as it gets more time to set its house in order. The loose monetary policy of the ECB adds further liquidity to the market. A move in the opposite direction would have brought back fears of a repeat of the volatility in the Indian markets at the time of the US tapering. Indian central planners had imposed several restrictions to reduce volatility and restore market confidence. Many of these restrictive measures, unfortunately, still remain in place. The ECB’s stance offers greater confidence to investors, and lowers the risk of a flight of capital as well as exchange risk volatility. India is also invested in the EU member countries’ recovery from their economic crises. The EU remains one of India’s largest trading partners, and a spur in domestic consumption and investment in EU countries also means a larger appetite for Indian goods and services.