Table of Contents
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
- Flight of Capital
- Weaker Rupee= bigger CAD + bigger inflation
- Exports may not increase
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