Fed Tapering And Quantitative Easing – Indian Economy – Free PDF Download

Fed tapering

• It is the gradual reduction in the bond buying program of the US Federal Reserves.
• Tapering is the gradual winding down of central bank activities used to improve the conditions for economic growth.
• primarily aimed at interest rates and investor expectations of what those rates will be in the future.
• These can include conventional central bank activities, such as adjusting the discount rate or reserve requirements, or more  unconventional ones, such as quantitative easing (QE).

What is ‘Quantitative Easing’?

• It is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market  in order to lower interest rates and increase the money supply.
• It increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
• when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
• QE was carried out in three phases.
• Finally in Dec 2012, Chairman Ben Bernanke announced that he’ll stop the supply when EITHER unemployment rate is <6.5% OR  inflation is >2.5%.
• Because each condition implies that American farmers are booming.
• Dec 2013: Finally Chairman Ben Bernanke sees American farms are booming, there was no need to release lot of funds(dollar supply).
• [in reality – unemployment rate became lower than 6.5%]

How can Fed Tapering affect India?

• From Mexican drug lords to Hongkong smugglers to Russian arms dealers to Italian Mafias to Indian Bookies and        Match fixers-  everyone uses dollars. So any increase OR decrease in dollar supply  affects all economies.
• we saw the effect of Quantitative Easing (=increased dollar supply) on Indian Economy.

Let me summarize that in a table:

• Since QE = increase dollar supply and Fed tapering= decrease in dollar supply, so by common sense, every effect should become  reverse, right?

WORST CASE SCENARIO’S FOR INDIA

1. Flight of Capital
2. Weaker Rupee= bigger CAD + bigger inflation
3. Exports may not increase

Indian Economy | Free PDF

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