Explained_ Quantitative Easing- Meaning,Mechanism,Implication

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[Economy] Quantitative Easing: Meaning, phases, Impacts on Indian Economy, Rupee-Dollar

Exchange rate, Pros & Cons, Positive & Negative aspects explained

CSAT

1. Prologue

2. Characters in QE movie

3. [Act I] Subprime crisis: toxic assets

(2007)

4. [Act II] Quantitative Easing (2008)

5. Why cant LOW repo rate solve

problem?

6. Quantitative Easing: Electronic Money OUT OF THIN AIR

1. Concept#1: QE = NOT OMO

2. Concept #2: QE = NOT Monetized Debt

7. [PHASE] Quantitative Easing Phase 1

1. QE PH1: Impact on FDI / FII

2. QE PH1: Impact on Exchange Rates

8. [PHASE] Quantitative Easing Phase 2

9. [PHASE] QuantitativeEasing Phase 3

10. When will Ben stop QE?

11. Summary of Quantitative Easing

1. QE: Good or Bad? (American point of view)

2. QE: Good or Bad? (Indian point of view)

Prologue

Next article is Fed tapering and its impact on Indian Economy.

But to learn fed tapering, first we need to understand Quantitative easing (QE) AND its impact

on Indian economy.

Topic itself doesnt require more than 15-20 minutes to understand. IF your basics are clear. Somake sure youve read previous articles:

1. RBI monetary policy: quantitative and qualitative tools. Click me

2. Debt vs equity click me

3. Securitization & Shadow banks click me

Characters in QE movie

Since this is American story, our routine characters (Mohan/Chindu) wont have big roles in this

script. Let me introduce the main protagonists in QE/FT game:

days

25

hrs

11

mins

23

sec.

06
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lar-exchange-rate-pros-cons-positive-negative-aspects-explained.html#1


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Ben

Bernanke

when Quantitative easing started, He was the boss of

American RBI (Chairman of US Federal reserves.)

Right now Fed Chairman= Jenet Yellen.

Leonardo

DiCaprio

As such a Hollywood actor. But assume he works in

Citigroups retail banking operations. i.e. serving

American middleclass and small businessmen.

Tom

As such a Hollywood actor. But assume he also

works at Citigroups Investment operations i.e.
https://www.flickr.com/photos/97816112@N02/13313317163/


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Cruise American share market investments

as foreign institutional investment (FII) in India,

China and other countries.

[Act I] Subprime crisis: toxic assets (2007)

Subprime crisis = American banks gave home loan to people who did not have aukaat to repay

money. These Borrowers stopped paying installment and the banking system collapses.

^this is the crudest, simplest explanation. Most of you know this already.

But to understand Quantitative Easing and Fed Tapering, we need a little deeper understanding

of what exactly happened in subprime crisis? Especailly: mortgage based securities / toxic

assets.

Prime borrower He has the aukaat the repay loan

Sub-prime borrower He doesnt have the aukaatto repay loan.


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Initially, American Retail Banker Mr.Leonardo only lends money to prime borrowers. And for

repayment-guarantee, he orders customers to mortgage their property i.e. if I dont repay

loan, you can take away my house.

Thus, Leo has a big pile of mortgage property files say 100 files x 1 lakh dollar worth property

each = $100 lakh.He gives these files to Tom Cruise, the investment banker.

Tom prints out 10 lakh bonds, worth $10 each, offering say 4% interest rate. Sells them at

American market. We call them mortgaged backed securities (MBS).


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Mortgage

backed

Because theyre backedup by those loan-papers. If

anything bad happens, Tom can attach those homes,

auction then, and return money to those bond-

holders.

Securities

Any piece of paper, that promises to pay some

money to someone at someday = is calledsecurity.

Shares, bonds, IPOs, debentures.these are all

examples of securities. Places where theyre

bought and sold, we call it securities market.

Apart from MBS, they had collateralized debt obligations (CDO), collateralized loan obligations

(CLO) and so on. What are they? Not important for exam because too old topic. Just know that,

lot of Securities were created, that were backed up by those mortgaged home.

In USA, (sarkaari) treasury bonds offer interest rate of ~2% Obviously, investors will be

interested in Toms MBS (since it offers 4% return).

Tom

Cruise,

the

investment

banker

Leonardo please get me more loan papers. So, I

can printout more MBS securities! And our citigroup

makes even more profit!

Leonardo,

the retail

banker

But Im already done giving loans to every prime

borrower.

Tom

Then give loans to people who do not have the

aukaat to repay loans (Subprime borrowers). If they

dont repay, well mortgage property their property. In

short, our gameplan is safe and secure. Nothing to

worry.

Leo Starts giving loan to sub-prime borrowers.

Later, one by one, sub-prime borrowers stop EMI payments.

But, Tom still has to pay 4% interest to those investors for those mortage backed securities

(MBS). So, Tom attaches the houses of loan-defaulters. He tries to auction them, to recover

loan money and pay off those stupid investors.

But since there is such oversupply of mortgaged properties, that real-estate market collapses.


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Imagine fifty Titanics full of onion is dumped at @Mumbai port- whatll be the price then?

Same is the situation in American real-estate sector. Original loan amount was $1 lakh but right

now, noone is ready to pay even $30,000 for the same home.

As a result, even HONEST (prime) borrowers feel cheated. Why should I continue to repay my

loan, IF my house is not even worth 30000 dollars? So, he also stops giving EMI. => more

default=> more crash @real-estate.

The Fall of MBS

Thus, within overnight, mortgage backed securities (MBS) have become fancy tissue papers.

Because unlike Salman Khan, Tom Cruise cannot keep his commitment to pay interest to

investors.

What do we have now?

1. Mortgaged homes that dont fetch good prices in auction.

2. Mortgage backed securities (MBS), collateralized debt obligations (CDO) and other fancy

papers that commend no price in the sharemarket / securities market.

Lets collectively call them TOXIC Assets. (In India, we may have called them NPA, non-

performing assets.)

Consequences on World economy

1. Due to these toxic assets, lot of investors money stuck. Share market collapses. Businesses

collapse. Less demand => less jobs => less import of goods and services=> Indian, Chinese

every exporter / call center also suffers.

2. American FIIs pullout their money from Indian, Chinese, European markets to fill up the losses

at home. (Recall, Some Tom Cruise also look after FII operations in India, perhaps with help of

Anil Jhakkas Kapoor.) => even more slowdown in global economy.

3. This also acts as catalyst in PIGS crisis / Greece Sovereign debt crisis (click me)= even more

slowdown in world economy.

[Act II] Quantitative Easing (2008)

So far

American economy collapsed thanks to subprime crisis.

Banking / financial institutions (like CITIGROUP) have truckload of TOXIC assets. (or NPA)

Investors money is stuck.

Banks are not giving loans to new customers (fearing more toxic assets and loan-default). So,

whether its prime borrower or sub-prim borrower- no body getting no more money => no

business expansion => no new jobs => no salary=> no demand=> no sales / import.
http://mrunal.org/2012/06/econo-greece-exit.html


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Why cant LOW repo rate solve problem?

How can American RBI (US Federal reserve) fix this mess caused by Subprime crisis? One

solution will be:

1. Central Bank should lend (new) money to Retail banks at very cheap interest rate.

2. Then Retail banks will also start giving cheap loans to customers=> business expansion =>more jobs => more salary => more demand => people buy more=> economy back on track.

3. Indian RBI uses Repo rate for this. [click me for more]

4. American RBI uses Federal Fund rate for this. [although mechanism bit different but not really

important for exam. So let's not waste time here]

In the 90s, American federal fund rate = used to be in the range of 4-6%. (To crudely put, IF

American banks borrowed money from American RBI (US Feds), then American bank will have to

pay 4-6% much interest rate.)

Ben Barnanake indeed reduced the interest rate- close to 0% but it didnot workout exactly as

planned. Why?


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Scene #1: NRI Alok Naths Business woos

Ben

Bernanke

(Recall hes the Boss of American RBI /Chairman of

US Fed).Ok fellas, Im reducing American federal

fund rate to 0.25%. Come on! Take loans from me


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and distribute among your clients.

Leo

(American

retail

Banker)

Im going to borrows truckload of dollars from

American RBI because its available at throwaway

prices! Have to pay just 0.25% interest rate.

NRI Alok

Nath

I want to open a marriage-bureau. Please give me

loan.

LeoIm giving no loans to anyone! Im sick and tired of

loan defaults. I want to take no more risk.

NRI Alok

Nath

Lekin Betaa, youve borrowed truckload of cash from

American RBI (US Feds). Whatre you going to do

with all that money? uskaa achaar daaloge kya?

Leo

Ill do following things with this dollars I got from

American RBI

1. Ill simply invest part of those dollars in US

(Sarkaari) Treasury bonds. They are considered

the safest investment option. They offer ~2%

interest, So my profit is 2-0.25=1.75%. Well

something is better than nothing.2. Ill give part of those dollars to my buddy Tom

Cruise, hell invest them in India, China and other

markets as FII. Perhaps hell get ~8% return.

So, our profit is 8-0.25=7.75%. Again something

better than nothing.

3. Invest part of them in gold

4. Redistribute some of the dollars as dividends

among my shareholders. That way price of

citigroup shares go up, and my buddy Tom will

again create a new financial product out of that

to make more money!

5. buy off smaller banks, so I get monopoly in the

banking business.

NRI Alok

Nath

Ok, then Im ready to pay 10% interest. Please give

me loan.

Sorry uncle-ji. I dont want to take any risk from any

borrower. I already have lot of toxic assets on my


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http://mrunal.org/2014/03/economy-quantitative-easing-meaning-phases-impacts-indian-economy-rupee-dollar-exchange-rate-pros-cons-positive-negati 10/24

Leo plate. Please, try at some other bank.

NRI Alok

Nath

(leaves the office, but not without givingaashirwaad to

Leonardo DiCaprio).

Scene#2: how to make banks lend money?

Location: Ben Bernankes cabin at US federal Reserves (=American RBI)

Ben

(observing the data of industrial output, employment, GDP

everything. )Although Ive reduced the interest rates, Why is

the economy not improving, why is there no business

expansion? Why are no new jobs created?

Aha.Leonardo DiCaprio is the culprit. He is not passing

on my cheap dollars to loan seekers.

Ben(calls up Leo) Man you Stop this nonsense right now, and

give loans to those needy American folks.

Leo

Not gonna happen. Have lot of toxic assets in my account

books. If I give loan to anyone, and he defaults, my Citi

group will collapse completely.

Ben

But man, those toxic assets are Tom Cruises problem. If I

recall correctly, you-Mr.Leonardo-Retail banker- you gave

loan files to the investment arm of Citibank, so Tom must

have paid some money to you, right? How come your

department has toxic assets?

Leo

You see we are not a simple bank. We are a Financial

institution. Some of our organs under jurisdiction ofAmerican RBI, some organs under regulation of

American SEBI, with operations in India, China etc.

under jurisdiction of their RBIs and their SEBIs.

Its lot more complicated financial jugglery than you can

fathom (iss ki topi uss ke sar pe). But right now we

are in mess due to those toxic assets. In short, difficult

to pass loans to customers.

Ben

(agitated, but has to find solution quick, before system

collapses further)OK Leonardo. How about I buy the toxic

assets Citigroup and all other financialjugglers institutions.


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Then, will you give loans to those needy customers?

Please?

Leo Fair enough.

Quantitative Easing: Electronic Money OUT OF THIN AIR

So far, Ben agreed to buy off toxic assets of citigroup and other banks. But Ben doesnt want to

waste time printing that much paper currency or coins. He simply types an amount in his

super computer at US feds office. And that much (electronic) dollars are automatically created

in the banking system.When Leonardo (and other retail bankers) sell their TOXIC ASSETS to Ben, Mr.Ben will

transfer dollar in their account via netbanking.

ok, so, what is happening here? Money supply increased or decreased?

Ans. Increased.

Because Charlie and other retail bankers sold their tomatoes (toxic assets) to Ben. Ben paid in

dollars. So money supply increased (in the sense that now retail Bankers have more money tolend to customers.)

Does it mean Ben is buying tissue papers in exchange of dollar? (After those MBS/Toxic assets

are not much money right?) Well Ben hopes that once economy recovers, those mortgaged


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houses could fetch higher prices in auction, then he can sell MBS to private investors and

recover the money.

This is called quantitative easing

Quantitative Quantity of money increased.

Easing

stress / tension of Banks decreased. because

American RBI (US feds) took away their toxic

assets

For MCQ: please keep following concepts in mind

Concept#1: QE = NOT OMO

OPEN MARKET

OPERATION

(OMO)

QUANTITATIVE EASING (QE)

American RBI

sells OR buys

government

securities

(treasury bonds)

from the market.

American RBI buys securities, including

those TOXIC assets.

If they buy=>

money

supply

increased

Since theyre only BUYING=> money supply

increased. No If no But.

If they sell=>

money

supply

decreased.

QE Cannot decrease money supply. (Well you

have to do a separate thing called fed

tapering, well see that soon.) For moment,

know that QE only INCREASES money

supply. QE itself cannot decrease money

supply.

Concept #2: QE = NOT Monetized Debt

MONETIZING THE DEBT QUANT.EASING (QE)


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President Obama wants

more dollars to settle his

sarkaari debt. (fiscal

deficit, budget deficit

whatever.)

He prints treasury

bonds=> gives to

American RBI (US Feds)

e.g 100 Billion $ treasury

bonds promising 2%

interest rate for ten years.

Then American RBI (US

feds), prints that much

dollar Currency and gives

suitcases to Obama.

This is called Monetizing

the debt.

American RBI buying toxic

assets from those banks

and financial institutions

like Lehman brothers.

[They also bought treasury

bonds from market, but

main focus was to remove

"toxic assets" from system].

American RBI takes

securities from government

and creates more money.

American RBI takes (toxic)

securities from those bankers,

and creates more money.

Increases the money supply in

the system.same

Anyways, lets move on: Quantitative Easing was done in three phases, starting from 2008.


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Click to Enlarge

[PHASE] Quantitative Easing Phase 1

Note: these dates and numbers are not important for exam. Ive listed them only to demonstrate how

events unfolded.

Nov

2008

American RBI (US Feds) starts buying mortgage

backed securities (MBS) (= those TOXIC Assets).

Each month $100 billion worth toxic assets bought.

[+some treasury bonds]. Collectively, well call them

Securities

Meaning $100 billion new fresh money injected in the

system each month.

March

2010

Phase 1 of QE ends. US feds bought total $1.7 trillion

dollars worth securities.

Now Ben waits for result. He thinks his plan is TOTALLY AWESOME, those toxic assets are

out of the banking sector, now those retail banks ought to be giving more loans to Alok Naths

=> more business expansion =>more jobs=>economy must have bounced back.

But when Ben analyses the data, hardly anything has improved! Industrial production sucks,

unemployment rates are high, GDP growth is low. Why havent things changed?

because retail bankers (Leonardo), is not quickly processing the loan applications of needy

Americans.


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Leo is happy that his own toxic assets are cleared. But he still doesnt want to take risk of giving

loans to people. He continues investing money in treasury bonds, gold, (+Tom Cruise investing

dollars to foreign countries sharemarket as FII).

QE PH1: Impact on FDI / FII

Quantitative Easing => Dollar supply increased in American market.Ben Bernanke hoped these dollars will be given as loans to American people, so they can start

new business, create more jobs, produce more goods and services..

But lot of these dollars did not reach the hands of common Americans.

#1: FDI inflows increased in emerging economies

Big businesses like Apple, Microsoft, wallmart=> They got cheap loans, but they did not invest it

for business expansion in America.Because American juntaa did not have the money to buy their products in large amount. So

these MNCs started exploring Asian market for new customers.

They thought lets produce phones, camera, laptop and softwares within Asia rather than in

USA to save transport costs.

So, MNCs used cheap dollar loans for setting new factories / offices in Asian countries.

Result: FDI inflows increased for Asian countries including India, China.

#2: FII inflows increased in emerging economies

MNC type financial institutions (FI) such as Deutsche Securities, Bank of America, Morgan

Stanley, Goldman Sach, JP Morgan Chase, Citizenbank etc.

They reduced investing in American sharemarket (because nobody buying anything,

companies dont make large profit, hardly any dividends. So why bother in American

sharemarket?)

So, these FIIs took Dollars from America and invested in share/bond/equities/IPO in India-China

and other emerging economies.Result FII inflows also increased in the emerging economies.

QE PH1: Impact on Exchange Rates

So far, we know Quantitative easing increased the FDI, FII inflows in emerging market

economies.

what could have happened to exchange rates? Did Rupee strengthen or weaken? Did Dollar

strengthen or weaken?Ans. Since dollar supply increased (compared to rupee), then Dollar weakens and rupee

strengthen. Observe.


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Month 1$=__ rupees 1 Rs.=___ $

Jan 2009 50 0.02

October 2009 46 0.0217

March 2010 (when QE1

ended)

44 0.0227

MeaningDollar

weakened

Rupee

strengthened

So what do you see? IS Rupee strengthening or weakening?

Ans. Rupee Strengths, Dollar weakens.

Why? Because if those FDI/FII players want to invest in India, they need to convert their Dollars intorupees.

Imagine dollars are apples.

Prices of apple vs Rupee are decided by laws of supply and demand.

If few apples=> each apple will sell for 50 rupees.

If more apples=> each apple will sell for 44 rupees. (more the quantity, cheaper the product.)

Same happened with all major currencies in world yen, yuan, euro, pound, rupee they

strengthened while dollar Weakened.

Is it good or bad?

Ans. Depends

If Dollar

weakens:Implications

American

importer

Bad because he has to give more dollars to buy

same amt of Indian products. []

American

exporter

Good, because now American products cheaper (for

Indian importers) = more demand of American

exports.

Indian

ExporterBad

Indian

importerGood.


17/24



Enough of Phase 1, lets move to


Location: Bens cabin @American RBI office (i.e. US Federal reserve)

Ben check data on GDP, loan disbursement, industrial production, inflation, unemployment etc.

Hardly anything has improved.

What has

Ben DoneWhat did Leonardo do

I bought off

Toxic assets

(MBS) from

Leo

I used most of those dollars to buy treasury

bonds, gold, and foreign investment rather than

givingem as loans to needy American people.

Leo (any American retail bank) is still not processing loan applications quickly. Because there are

no prime borrowers- left! Almost everyone is broke / subprime thanks to recession. Besides,

given the FDI, FII outflows from USA, local companies are not getting any capital to expand

business.

Ben

Let me fix this. Ill buy off all those treasury

bonds from the market. Then where will Leo

(American retail banks) investment their money,

huh?

Theyll HAVE TO loan money to needy

Americans.[To put this in technical terms- Ben's

move will decrease the bond yields for Leo,

making it less profitable for him to continue in

bond game. Leo will then lend money to needyAmericans for better returns.]

November

2010

Ben starts buying (long term) US Treasury bonds

from market. He plans to buy total $600 billion

dollars worth bonds during QE phase 2.

June

2011

The QE2 phase ends.


18/24



Is money supply increased or decreased?

Increased. Because Ben is buying sarkaaribonds from investors, and giving them dollars as

payment. Thereby increasing money in the system. [What will happen if Ben started selling

treasury bonds? Will money supply increase or decrease? think about it].

anyways, Ben awaits for result. Analyzes the data. There is some improvement but lot needs to

be done. So, later he starts third phase.

Effect of QE2

Again same as last time- FDI, FII inflow increased in emerging economies. Dollar remained weak

compared to foreign currencies.

2010-11 $1=__ Rs.

Nov 2010 44

March 2011 45

June 2011 45.3


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You can see rupee almost steady at around 44-45. Meaning dollar kept coming to Indian market in

form of FDI and FII. (Thats why rupee demand was higher, and rupee remained strong.)


Ben Bernankes situation is like that of a senior UPSC player stuck in a vicious cycle of prelim-

mains-interview. His best intentions and efforts are not yielding positive results. Life is in

stalemate. Everyone else is winning and making money.

Ben decides to give third attempt with full preparation- he starts buying both toxic assets (MBS)

as well as Treasury bills. [to increase money supply in the market, hope at least some of the

dollars will reach to needy American folks.]

September

2012

Ben starts buying $40 billion worth toxic assets

(mortgage backed securities/MBS) each month

Ben also promised hell keep fed fund rate

(their repo rate) at 0% till 2015.

December

2012

Ben starts buying $45 billion worth Treasury Bills

each month. (+40 bn worth MBS)=45+40= total $85

billion dollars injected in the system every month=

dollar supply increased.

Finally someone (most probably an American civil service aspirant) sends facebook message to

Ben:

Dear Sir-ji,

For how long, will you keep throwing more and more money like a defeated gambler?

For how long, will you keep creating more and more (electronic) dollars out of thin air and let themvanish in India, China and other third world countries?

Man Im sick and tired of mugging up your QE data for stupid competitive exams. Please stop this

nonsense ASAP.

Sincerely,

A concerned American citizen.

Ben finally gains some enlightenment, I cannot go on like this forever! Have to stop QE at some

point.


20/24



When will Ben stop QE?

target Bens thought process

Inflation 2.5%

If inflation gets higher than 2.5%, Ill stop QE.

Because (moderate) rise in inflation =juntaais

buying more (hence the demand side inflation)=economy has recovered. And since economy

has recovered, QE should be stopped.

Unemployment

6.5%

If unemployment get lower than 6.5%, Ill stop

QE. Because less unemployment = definitely

there is business expansion = American

economy Has recovered. No more need for QE.

Meaning EITHER inflation >2.5% OR unemployment


21/24



More dollars= Easier access to

credit / capital => business

expansion=> more jobs=> more

demand (Because salary in hand)

=> sales increased, economybooms.

Within USA, It didnt

stimulate as much

economic growth as

Ben had hoped.

Most of the new jobs

were created inforeign countries,

rather than in USA.

Bens (Sarkaari) Treasury Bondbuying program: now investors

had to look out for new avenues to

pump money i.e. corporate

bonds, equities, IPOs= more

capital for American

businessman=business

expansion =more jobs=growth.

Not really. Once

investors were

forced out of

treasury bond game,

they started putting

money in gold.

As a result: within

2008 to 11, gold

prices soared from

~850$ to ~1900

dollars! [= gold

expensive even forIndia= our Current

account deficit

increased.]

Dollar weakened against foreign

currencies, benefiting the American

exporters.

American exporters

couldnot get easy

loans from banks to

expand production.=> still could not

compete with Asian

giants pricewise.

Besides, Weak

dollar= bad For

American importers.

=> higher Current

Account deficit for

USA.


22/24



Big banks/financial

institutions used

these dollars to buy

off small loss

making banks. Thus

banking sector

became oligopoly.

Today largest 0.2%

of American banks

control more than

70% of bank assets

in America.

QE: Good or Bad? (Indian point of view)

Two main reasons why it was (mostly) bad

#1: Nuisance Hot Money

Recall Tom Cruise, the investment banker / FII.

Hell pump money into Indian share market. Say in ABC Infra. Company. Tom keeps buying and

buying= Prices of the shares go higher and higher -1000, 1200, 1500..(supply, demand and

speculation).

The desi investors (aam admi), also buy those shares @1500, hoping its price will rise to 2000

rupees next week.

But within a week, Tom Cruise (FII)s expert tell him to invest in Xyz Chinese Companys

shares for better returns. For these billion dollar FIIs, even return difference of 2% will translates

to millions. Hence they move money from one nation to another at rapid speed.

So Tom immediately sells ABC infra shares to pullout his (rupee) money, gets them converted

to yuan and buys Chinese company shares.

Then ABC shares suddenly collapse- barely 700-800 rupees. (supply-demand-speculation)

As a result, desi investors (aam admi)s money is lost [because they had bought @1500].

This nuisance of FII hotmoney= one of the biggest reason why sharemarket has gone up and down

in a volatile manner in recent years.

#2: Headache for Exporters, Importers & RBI

In above point, we saw how FII rapidly inject and pull out their money from a country =>

exchange rates become volatile. (After all, its dollar vs rupee supply demand.)

Although QE = dollar supply increased = rupee should strengthen. But given the above


23/24



nuisance of FII Hot money, rupee would keep fluctuating. (and weve to blame Mohan also-

because policy paralysis= provokes FIIs to pullout money.)

when exchange rates keep fluctuating (say today 1$=55 Rs. and tomorrow $1=65 Rs.), this is

not conductive for business planning- neither for importer nor for exporter because they cannot

decide their calculations about input cost, taxes, profit margin, everything gets messed up.

Long term business planning is mission impossible (thanks to Tom cruise this time!).

Then RBI has to intervene to keep the exchange rates stable. How? Recall Apples, fridges and

Urjit Patel click me

Anyways, lets check positive and negative impact of US Quantitative easing on Indian economy.

POSITIVE NEGATIVE

During the initial

phase: More dollarsupply=>More FII,

FDI investment

This helped in

business

expansion= more

jobs, more

production more

GDP growth.

FII investment were mostly hot

money theyd pull out from our

market, as soon as they saw even

slightly better returns in another

country. = lot of ups and downs,

volatile share market.

FDI: in the early phase [2008-10],

we had not relaxed FDI rules. So

we couldnt attract as much FDI

(From USA) like other emergingeconomies.

In the later part of QE era (mid

2012 onwards), all the positive

factors were lost because of

domestic inflation and policy

paralysis. Leading to decline in

FDI/FII (compared to what we

deserved)

Rupee strengthened

against dollar. (e.g

$1=Rs.50 to$1=Rs.40).

Good for importers.

Bad for exporters and call centers

Plus, they were already seeing

less orders due to recession like

situation in US and EU during this

era. So, rupee strengthening =

adding insult to their injury.

2012: FII injected ~18
http://mrunal.org/2014/02/economy-rbi-urjit-patel-committee-4-cpi-nominal-anchor-multiple-indicator-monetary-policy-framework-reforms-part-1-of-2.html#exchange


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billion USD in Indian

market. (That too

despite policy paralysis,

GAAR controversy.)

They would have invested even more if

there was no policy paralysis / GAAR

controversy.

Cheaper dollar helped

Indian corporates toborrow from abroad.

Indias external debt increased

(especially when later 1$=becameclose to Rs.65)

RBIs forex reserves

increased. Because

cheap dollars, RBI could

collect more by selling

its rupee reserves in

exchange of dollars.

Forex reserve increased only for the

first two years of QE. Later hardly any

improvement, in fact forex reserve

declined in 2013 (when RBI tried to

stop rupee downfall by selling its own

dollars in market)

With inputs from Mr.Shivaram G.

Mock questions, after we are done with fed tapering in next article.

Visit Mrunal.org/EconomyFor more on Money, Banking, Finance, Taxation and Economy.
http://mrunal.org/Economy

Documents

Explained_ Quantitative Easing- Meaning,Mechanism,Implication