ECB cuts benchmark rate, move to weigh on rupee

China also reduces rates, Bank of England opts for status quo

With the European Central Bank cutting its main interest rate to a record low of 0.75 per cent — a decision that weakened the euro against all other major currencies — market players expect the rupee to come under pressure tomorrow. The European Central Bank also cut its deposit rate to zero on Thursday to help tackle the euro zone crisis that threatens to push the bloc’s deteriorating economy back into recession. The announcements came after the close of Indian markets.

The rupee lost for the second straight session after it gained for four consecutive days to close the day at 54.96 a dollar — 46 paise or 0.8 per cent lower than the previous close. It touched an intra-day high of 54.79 and low of 55.23 on Thursday. The Indian currency tracked the euro as it fell from 1.26 levels seen on Tuesday to 1.24 levels on Thursday.

Though the ECB action was on expected lines, what came as a surprise was China’s decision to cut interest rates (the announcement came just before the close of market hours). That helped the rupee shed losses as the Chinese central bank’s move was seen as a positive one to revive growth in a key emerging market. China announced the rate cut as the Bank of England launched a third round of monetary stimulus.

“Significant FII flows to India would have been possible had the ECB increased LTROs (long-term refinancing operations). However, zero interest on deposits (which was already 0.25 per cent) or cutting of key interest rates may not necessarily bring any big inflows,” said U R Bhat, managing director, Dalton Capital Advisors (India).

Andrew Holland, CEO of the investment advisory division at Ambit Capital, is of the view that major inflows to India would start only after the Presidential election if Prime Minister Manmohan Singh is able to deliver on various promises.