USA Quantitative Easing (QE) & Fed Tapering : Impact on India

Question 1

What is Quantitative Easing (QE)?

Answer 1

Quantitative Easing (QE) is an unconventional monetary policy tool used by central banks (like the US Federal Reserve) to stimulate the economy. It involves the central bank purchasing large amounts of government bonds or other securities to inject money into the economy, lower interest rates, and encourage lending and investment.

Question 2

How does Quantitative Easing impact India’s economy?

Answer 2

Increased capital inflows: Lower interest rates in the US due to QE can lead to investors seeking higher returns in India, boosting the stock market and rupee value.
Lower bond yields: QE can indirectly lower yields on Indian bonds, making them less attractive to some foreign investors.

Question 3

What is Fed Tapering?

Answer 3

Fed tapering is the process of the Federal Reserve gradually reducing or ending its bond-buying programs (Quantitative Easing). This signals a shift towards tighter monetary policy and can lead to rising interest rates in the US.

Question 4

What are the potential effects of Fed Tapering on India?

Answer 4

Reduced capital inflows: Investors may move money out of India and back to the US as interest rates there rise, potentially causing rupee depreciation and stock market fluctuations.
Increased bond yields: Indian bond yields might rise in anticipation of higher US rates, making them more attractive for investors but also increasing borrowing costs for India.

Question 5

How can the severity of Fed Tapering’s impact on India be influenced?

Answer 5

Strength of the Indian economy: A strong economy with healthy forex reserves is better positioned to handle capital outflows.
RBI’s response: The Reserve Bank of India can manage the impact by adjusting interest rates or intervening in the currency market.