India may not be affected much by ECB rate cuts

Moneylife Digital Team 06 June 2014

In the event of growth in the Euro zone slowing down, Indian exports would tend to get affected – though the impact will not be too severe, says CARE Ratings

The European Central Bank (ECB) on Thursday announced unprecedented measures in its monetary policy review meeting to continue its ongoing stimulus programme, in a bid to promote growth and deter the region from entering the deflationary trap. There were significant reductions in interest rates even as banks were signalled to increase lending. However, India may not be affected much, though slow growth in Euro region will affect our exports in a limited manner, says CARE Ratings in a report.

It said, "The crisis in Europe is to a large extent driven by low consumption and investment, which cannot be reversed easily by lowering interest rates, especially when the longer term refinancing operations (LTRO), which injected a lot of liquidity, did not quite succeed to turn the economy around."

According to CARE Ratings, as a fallout of ECB moves, the US dollar is expected to rise, which may put slight pressure on the Indian rupee. "When juxtaposed with the continued stimulus by the ECB and thereby higher Euro flows in the market, the US dollar is imminently expected to rise against the Euro. The rise in the dollar in international markets will impose pressure on rupee to a slight extent. Indian rupee may witness volatility with slight risks of depreciation against the US dollar, if international forces (foreign institutional investors-FII flows) dominate over the prevailing domestic factors," it said.

As of FY13, India’s exports to the European Union were about 17%-20% of the total export basket. In the event of growth in the Euro zone slowing down exports would tend to get affected – though the impact will not be too severe, the ratings agency said.

CARE Ratings feels emerging economies are likely to remain the favoured destination for FIIs. It said, "Firstly, given the macro economic situation in the Euro zone with low growth and low inflation, it is unlikely that the Euro area will offer competition to the emerging economies as regards FII inflows. Extremely low interest rates will be a deterrent to foreign investment inflows in the region. Secondly, the Eurozone contributes to only 12%-13% of the total foreign currency inflows in India as majority foreign currency inflows come from the US. Hence, this scenario is unlikely to be changed going ahead."

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