For me, traditionally the form of reading newspaper used to get down and stop at athleticss page. But these yearss, I am being stretched to shop through fiscal intelligence. Lot of words and phrases like CRR, rearward repo rate, Basel 3 are featured in the newspaper late. One peculiar phrase called as Quantitative Easing -3 caught my attending some yearss ago by starting up often. Here is an effort to depict Quantitative Easing-3 and its impact on India.
First we need to understand the stakeholders in Quantitative Easing. Stakeholders are authorities, cardinal bank ( USA Fed in this instance ) , commercial Bankss and people like you and me. Let ‘s seek to understand the flow of money in government- cardinal banks-foreign investor web and Quantitative Easing on that footing.
Central Bank ( US Fed )
Loans / Debt
Government Bonds/ securities
Figure 1: Government-Central bank-Commercial Bankss web
US cardinal bank i.e. US Fed lends loans to US authorities for different strategies and undertakings authorities takes up. Government issues bonds against this debt. Typically commercial Bankss buy those bonds alternatively of imparting money to concerns in state as the output from authorities bonds is higher than that from concerns. But when economic downswing or recession occurs, cardinal bank feels the demand to increase the supply of money in the economic system. Central bank buys fiscal assets held by commercial Bankss e.g. bad securities or mortgages of belly-up companies. This encourages Bankss to impart money to concerns which in bend increases the ingestion of goods and services. By implementing this step, the cardinal bank injects a pre-determined measure of money into economic system. This is known as Quantitative Easing.
Now, have a expression at a phrase Quantitative Easing. It includes the addition in the measure of money injected in the economic system by easing the force per unit area of market. And since this policy had been implemented twice earlier, this coevals is known as Quantitative Easing-3 ( QE3 ) .
Central bank controls the supply of money in the economic system by implementing pecuniary policies. The conventional policies are listed below:
Bank modesty demands
Open market operations
Federal financess rate
Quantitative Easing is seen as an unconventional pecuniary policy. So, there is a school of idea which does non prefer QE. Reasons for the counter-argument:
Harmonizing to NASDAQ.com, QE3 allows the Federal Reserve to publish $ 40 billion dollars a month till occupation rate improves. This injection of extra money in the economic system devalues dollar which can take to weaker fiscal province.
The US economic system is turning at 2 % and rising prices is besides at about 2 % whereas unemployment is at approximately 8 % . Harmonizing to S & A ; P, the unemployment rate of America is non at so dismaying that a cardinal bank should see step like Quantitative Easing.
Now let ‘s seek to analyse the impact of this unconventional Quantitative Easing on India or India ‘s economic system per say.
Post 2008 downswing, QE1 and QE2 were implemented. QE1 was implemented from November 2008 to March 2010 and QE2 from November 2010 to June 2011. I have tried to set the impacts on assorted foreparts on India after QE1 and QE2 were declared in a tabular signifier below.
QE1 ( Nov 2008-March 2010 )
QE2 ( Nov 2010-June 2011 )
Rs. 1,00,000 Cr.
Rs. 40,000 Cr.
Crude Oil Monetary values
$ 40/bbl – $ 80/bbl
$ 80/bbl – $ 110/bbl
Gold Monetary values
$ 800/ounce- $ 1200/ounce
$ 1200/ounce- $ 1600/ounce
Current Account Deficit ( % GDP )
1.3 to 2.7
2.7 to 3.7
Inflation ( CPI )
6 % to 8 %
8 % to 16 %
Table 1: QE1 and QE2 impacts on India
After economic lag in 2008, the foreign institutional investors started retreating their investings from India. In twelvemonth 2008, FIIs withdrew 54,000 Cr. Worth of investing from India. But the tendency got reversed after declaration of QEs.
Crude Oil monetary values:
As we can see from the tabular array, the petroleum oil monetary values per barrel rose dramatically post QE declaration. And as India imports it ‘s 70 % of oil demand, it affected India drastically.
But with QE3, the guesss are slightly different. The rise in rough oil monetary value will acquire offset by the strengthening of rupee this clip.
Gold monetary values:
Gold is considered as a hedge against rising prices. As liquidness additions, the demand for gold additions lifting monetary values of gold. The gold monetary values doubled from induction of QE1 to stop of QE2.
Current Account Deficit:
Though QE is green for micro, macroeconomics characteristics in ruddy. CA shortage ran to 3.7 % of GDP in mid-2011. As import of gold histories for major portion of CA shortage, as gold monetary values rose, CA shortage got hit severely.
Inflation ( CPI ) :
CPI is Consumer Price index. This is an index to mensurate rising prices in a state. Inflation went up from 6 % to 8 % in QE1 period and up to 16 % in QE2 period which is rather high from RBI ‘s threshold CPI which is 5 % .
As above information shows the impact of first two QE steps on Indian economic system, there are similar guesss from fiscal experts for QE3 excessively. But things will go clearer as the clip passes.