Quantitative Easing- Meaning,Mechanism,Implication

7/25/2019 Quantitative Easing- Meaning,Mechanism,Implication

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- Mrunal - http://mrunal.org -

[Economy] Quantitative Easing: Meaning, phases, Impacts onIndian Economy, Rupee-Dollar Exchange rate, Pros & Cons,Positive & Negative aspects explained

Posted BySupport StaffOn 22/03/2014 @ 12:36 am In Economy | 121 Comments

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 11. QE PH1: Impact on FDI / FII

2. QE PH1: Impact on Exchange Rates

8. [PHASE] Quantitative Easing Phase 2

9. [PHASE] Quantitative Easing 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? (Indianpoint 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 itsimpact on Indian economy.Topic itself doesnt require more than 15-20 minutes to understand. IF your basics are

clear. So make sure youve read previous articles:

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

2. Debt vs equity click me3. 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:
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BenBernanke

when Quantitative easing started, He was the boss of American RBI (Chairmanof US Federal reserves.) Right now Fed Chairman= Jenet Yellen.

LeonardoDiCaprio

As such a Hollywood actor. But assume he works in Citigroups retail bankingoperations. i.e. serving American middleclass and small businessmen.

Tom

Cruise

As such a Hollywood actor. But assume he also works at Citigroups Investmentoperations i.e.

American share market investments

as foreign institutional investment (FII) in India, China and other countries.

[Act I] Subprime crisis: toxic assets (2007)
https://www.flickr.com/photos/97816112@N02/13313317163/


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Subprime crisis = American banks gave home loan to people who did not have aukaat torepay money. These Borrowers stopped paying installment and the banking systemcollapses.

^this is the crudest, simplest explanation. Most of you know this already.But to understand Quantitative Easing and Fed Tapering, we need a little deeperunderstanding of what exactly happened in subprime crisis? Especailly: mortgage basedsecurities / 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 Idont 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 atAmerican market. We call them mortgaged backed securities (MBS).


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Mortgagebacked

Because theyre backedup by those loan-papers. If anything bad happens, Tomcan 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 atsomeday = is called security.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 loanobligations (CLO) and so on. What are they? Not important for exam because too oldtopic. 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 beinterested in Toms MBS (since it offers 4% return).

TomCruise, theinvestment

banker

Leonardo please get me more loan papers. So, I can printout more MBSsecurities! And our citigroup makes even more profit!

Leonardo,

the retailbanker

But Im already done giving loans to every prime borrower.

TomThen 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 auctionthem, to recover loan money and pay off those stupid investors.But since there is such oversupply of mortgaged properties, that real-estate marketcollapses. 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 butright 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 torepay 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 toinvestors.

What do we have now?


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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, perhapswith 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)= evenmore 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. (orNPA)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.

Why cant LOW repo rate solve problem?

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

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 lets not waste time here]

In the 90s, American federal fund rate = used to be in the range of 4-6%. (To crudely put, IFAmerican banks borrowed money from American RBI (US Feds), then American bank willhave 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?
http://mrunal.org/2012/06/econo-greece-exit.html


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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, Imreducing American federal fund rate to 0.25%. Come on! Take loans from meand distribute among your clients.

Leo


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(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.

Leo Im 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 gold4. 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 anew 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.

Leo Sorry uncle-ji. I dont want to take any risk from any borrower. I already have lotof toxic assets on my plate. Please, try at some other bank.

NRI Alok

Nath (leaves the office, but not without giving aashirwaad 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 Ivereduced 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. Heis 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, soTom must have paid some money to you, right? How come your department hastoxic assets?

You see we are not a simple bank. We are a Financial institution. Some of our


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Leo

organs under jurisdiction of American RBI, some organs under regulation ofAmerican SEBI, with operations in India, China etc. under jurisdiction of theirRBIs 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 financial jugglers institutions.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 doesntwant to waste time printing that much paper currency or coins. He simply types anamount in his super computer at US feds office. And that much (electronic) dollars areautomatically created in the banking system.

When Leonardo (and other retail bankers) sell their TOXIC ASSETS to Ben, Mr.Benwill 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


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paid in dollars. So money supply increased (in the sense that now retail Bankers havemore money to lend to customers.)Does it mean Ben is buying tissue papers in exchange of dollar? (After those MBS/Toxicassets are not much money right?) Well Ben hopes that once economy recovers, thosemortgaged 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 MARKETOPERATION (OMO)

QUANTITATIVE EASING (QE)

American RBI sells ORbuys governmentsecurities (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 Ifno But.

If they sell=>

money supplydecreased.

QE Cannot decrease money supply. (Well you have to do aseparate thing called fed tapering, well see that soon.) Formoment, know that QE only INCREASES money supply. QEitself cannot decrease money supply.

Concept #2: QE = NOT Monetized Debt

MONETIZING THE DEBT QUANT.EASING (QE)

President Obama wants more dollars to

settle his sarkaari debt. (fiscal deficit,budget deficit whatever.)He prints treasury bonds=> gives toAmerican 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 givessuitcases to Obama.This is called Monetizing the debt.

American RBI buying toxic assets from

those banks and financial institutionslike Lehman brothers.[They also bought treasury bonds frommarket, but main focus was to remove

toxic assets from system].


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American RBI takes securities fromgovernment and creates more money.

American RBI takes (toxic) securities fromthose 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.

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 SecuritiesMeaning $100 billion new fresh money injected in the system each month.

March2010

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 toxicassets are out of the banking sector, now those retail banks ought to be giving more loansto Alok Naths => more business expansion =>more jobs=>economy must have bounced

back.But when Ben analyses the data, hardly anything has improved! Industrial productionsucks, 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


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Americans.Leo is happy that his own toxic assets are cleared. But he still doesnt want to take risk ofgiving loans to people. He continues investing money in treasury bonds, gold, (+TomCruise 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 notinvest 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 inIndia-China and other emerging economies.ResultFII 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 marketeconomies.

what could have happened to exchange rates? Did Rupee strengthen or weaken? DidDollar strengthen or weaken?Ans. Since dollar supply increased (compared to rupee), then Dollar weakens and rupeestrengthen. Observe.

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

Jan 2009 50 0.02October 2009 46 0.0217

March 2010 (when QE1 ended) 44 0.0227

Meaning Dollar weakened Rupee strengthened


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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 theirDollars into rupees.

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 theystrengthened while dollar Weakened.

Is it good or bad?

Ans. Depends

If Dollarweakens:

Implications

American

importer Bad because he has to give more dollars to buy same amt of Indian products. []

Americanexporter

Good, because now American products cheaper (for Indian importers) = moredemand of American exports.

IndianExporter

Bad

Indianimporter

Good.

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 Done What did Leonardo do

I bought off Toxicassets (MBS) fromLeo

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 thereare 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 toexpand business.


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Ben

Let me fix this. Ill buy off all those treasury bonds from the market. Thenwhere will Leo (American retail banks) investment their money, huh?Theyll HAVE TO loan money to needy Americans.[To put this intechnical terms- Bens move will decrease the bond yields for Leo, making

it less profitable for him to continue in bond game. Leo will then lendmoney to needy Americans for better returns.]

November

2010

Ben starts buying (long term) US Treasury bonds from market. He plans to buytotal $600 billion dollars worth bonds during QE phase 2.

June 2011 The QE2 phase ends.

Is money supply increased or decreased?Increased. Because Ben is buyingsarkaaribonds 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 lotneeds to be done. So, later he starts third phase.

Effect of QE2


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Again same as last time- FDI, FII inflow increased in emerging economies. Dollar remainedweak compared to foreign currencies.

2010-11 $1=__ Rs.

Nov 2010 44

March 2011 45

June 2011 45.3

You can see rupee almost steady at around 44-45. Meaning dollar kept coming to Indian marketin 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 ofprelim-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 leastsome of the dollars will reach to needy American folks.]

September2012

Ben starts buying $40 billion worth toxic assets (mortgage backed

securities/MBS) each monthBen also promised hell keep fed fund rate (their repo rate) at 0% till 2015.

December2012

Ben starts buying $45 billion worth Treasury Bills each month. (+40 bn worthMBS)=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 toBen:

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

them vanish 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 atsome point.

When will Ben stop QE?


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target Bens thought process

Inflation 2.5%

If inflation gets higher than 2.5%, Ill stop QE. Because (moderate) rise ininflation =juntaais buying more (hence the demand side inflation)=economy has recovered. And since economy has recovered, QE should bestopped.

Unemployment

6.5%

If unemployment get lower than 6.5%, Ill stop QE. Because less

unemployment = definitely there is business expansion = Americaneconomy Has recovered. No more need for QE.

Meaning EITHER inflation >2.5% OR unemployment business expansion=> more jobs=> more demand(Because salary in hand) => sales increased,economy booms.

Within USA, It didnt

stimulate as much economicgrowth as Ben had hoped.Most of the new jobs werecreated in foreign countries,rather than in USA.

Bens (Sarkaari) Treasury Bond buying program:

now investors had to look out for new avenues to

Not really. Once investorswere forced out of treasury

bond game, they startedputting money in gold.


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pump money i.e. corporate bonds, equities,IPOs= more capital for American

businessman=business expansion =more

jobs=growth.

As a result: within 2008 to 11,gold prices soared from ~850$to ~1900 dollars! [= gold

expensive even for India= ourCurrent account deficitincreased.]

Dollar weakened against foreign currencies, benefitingthe American exporters.

American exporters couldnotget easy loans from banks toexpand production. => stillcould not compete with Asiangiants pricewise.

Besides, Weak dollar= bad ForAmerican importers. => higherCurrent Account deficit for

USA.

Big banks/financialinstitutions used these dollarsto buy off small loss making

banks. Thus banking sector

became oligopoly.Today largest 0.2% ofAmerican banks control more

than 70% of bank assets inAmerica.

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 to2000 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 atrapid speed.So Tom immediately sells ABC infra shares to pullout his (rupee) money, gets themconverted to yuan and buys Chinese company shares.

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


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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 anddown 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 abovenuisance of FII Hot money, rupee would keep fluctuating. (and weve to blame Mohanalso- 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 getsmessed up. Long term business planning is mission impossible (thanks to Tom cruise thistime!).Then RBI has to intervene to keep the exchange rates stable. How? Recall Apples, fridgesand Urjit Patel click me

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

POSITIVE NEGATIVE

During the initial phase:

More dollar supply=>MoreFII, FDI investmentThis helped in businessexpansion= more jobs, more

production more GDPgrowth.

FII investment were mostly hot money theyd

pull out from our market, as soon as they saw evenslightly better returns in another country. = lot ofups and downs, volatile share market.FDI: in the early phase [2008-10], we had not

relaxed FDI rules. So we couldnt attract as muchFDI (From USA) like other emerging economies.

In the later part of QE era (mid 2012 onwards), allthe positive factors were lost because of domestic

inflation and policy paralysis. Leading to declinein FDI/FII (compared to what we deserved)

Rupee strengthened against dollar.

(e.g $1=Rs.50 to$1=Rs.40). Goodfor importers.

Bad for exporters and call centersPlus, they were already seeing less orders due to

recession like situation in US and EU during thisera. So, rupee strengthening = adding insult totheir injury.

2012: FII injected ~18 billion USDin Indian market. (That too despite

policy paralysis, GAARThey would have invested even more if there was no

policy paralysis / GAAR controversy.
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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controversy.)

Cheaper dollar helped Indian

corporates to borrow from abroad.

Indias external debt increased (especially when later

1$=became close to Rs.65)

RBIs forex reserves increased.Because cheap dollars, RBI couldcollect more by selling its rupee

reserves in exchange of dollars.

Forex reserve increased only for the first two years ofQE. Later hardly any improvement, in fact forex reservedeclined 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.

Article printed from Mrunal: http://mrunal.org

URL to article: http://mrunal.org/2014/03/economy-quantitative-easing-meaning-phases-

impacts-indian-economy-rupee-dollar-exchange-rate-pros-cons-positive-negative-aspects-explained.html

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Quantitative Easing- Meaning,Mechanism,Implication