The decision of the European Central Bank (ECB) to pump 60 billion euro every month into the European economies...
The decision of the European Central Bank (ECB) to pump 60 billion euro every month into the European economies is likely to benefit emerging markets and especially India given the country’s better economic growth prospects, falling inflation, stable currency and declining current account deficit.
Steps taken by Reserve Bank of India to rein in inflation and reduce current account deficit, and the government’s focus on reforms and removing bureaucratic bottlenecks for reviving growth have renewed optimism among investors, leading to a record net inflow of $43 billion from foreign institutional investors in 2014.
For the Indian equity market, which is in a phase of earnings growth, the ECB’s quantitative easing (QE) could mean an expansion in price-earnings (P/E) multiple. In fact, the Indian equity market has shown a strong correlation with the QE of the US Fed, as FIIs have invested $60 billion in Indian equities after the implementation of the third phase of stimulus.
Investors have turned positive on India as fiscal consolidation continues despite sluggish tax collections, and progress is being made on much-needed tax and expenditure reforms, such as the goods and services tax and direct benefit transfer. Moreover, falling oil prices have increased confidence in the sustainability of the decline in inflation and a recovery in growth. As a result, even in the recent risk-off mode triggered by the sharp fall in oil prices and concerns over a Greek exit from the European Monetary Union, the rupee has been stable.