The European Central Bank (ECB) has found a sweet spot yesterday, delivering credible monetary stimulus while nodding to the hawks' concerns. This poses an upside risk to our 2015 1.2% growth forecast for the Euro area. Marking to market, they have changed the EUR/USD forecast to 1.10 by end-2015 and 1.05 by end-2016, from 1.20 and 1.15 respectively.
Bank of America Merrill Lynch (BofA-ML) expects ECB QE should support portfolio equity inflows to Indian markets, despite Fed tightening.
'BSE Sensex at 33000 by December 2015,' opined BofA-ML.
'Our BoP estimates pencil in USD 25 billion of portfolio inflows in FY16,' it said.
'We expect the RBI to err on the side of caution till Fed rate hikes are priced in despite strong FII G-sec demand. It will likely hike the FII G-Sec limit - currently exhausted - by a limited USD 5 billion after the February 28 Budget. FII debt inflows will be skewed towards quasi sovereigns with 65% of USD 51 billion FII debt limit utilized so far,' BofA-ML added.
BofA-ML also expects RBI governor Raghuram Rajan to recoup FX to fight possible contagion when the Fed likely raises rates in September.
'On balance, we expect the RBI to hold Rs 60-65/USD in view of US Dollar strength,' it opined.
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