EU Re-dresses it's Policy...

European Union is a conglomeration of various European countries was going under a deflationary phase. European Unions Central Bank has served a new recipe to move it out of the deflationary phase.

European union for the past few years was having a inflation rate around 0.5% which is far below the acceptable level. Indians would believe that it is good for the country as they know the suffering of a 10% inflation rate. Well we should not forget that some level of inflation is desirable for the country. It is so because such a low level of inflation leads to lower prices and producers are not encouraged to produce; as to why a producer should produce to sell it at such a low price which will not let him make a good chunk of profits. So it reduces investments in country and country goes into slumber. EU was experiencing the same slumber for quite a few years. So it was a high time for EU's central to take some extraordinary measures to gain the confidence of producers.

To ensure it EU has decreased it's interest rate to a negative which means people will have to pay money to banks to deposit their money with them. It will increase  liquidity in the markets and people will have no option other than spending the money or investing their money. Both these things may bring back the lost confidence in EU.

It will lead to depreciation of the euro which will make the EU's export more competitive in the international markets and hence increase the demand of EU's goods further. Further injecting nitro fuel in the slagged production cycle.

Well the effect of such a very very soft or easy monetary policy may go even other way around. As such an easy monetary policy might lead to investors taking highly risky ventures which may not yield returns and might lead to breakdown of the financial structure and banking crises.

 But many critics are taking it as a positive step as they believe, that the advantages due to such a policy far outweighs the drawbacks and hence net effect would be positive.

But we Indians will also have to be cautious about the unprecedented flow of money in the stock markets to get higher profits which might make our economy volatile. But on a positive note it will also increase the demand of the Indian exports in EU.

But all these are assumptions and we cannot expect constancy in  human behavior as it fluctuates now and then and we never know which direction it takes in future.

So India should follow a wait and watch policy in the background of the EU policy.