Quantitative EasingFed Tapering

QE, FT[GS2] Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.

Impact on IndiaDollar Supply FDI-FII Exchange

RateImport Export

Sub Prime Crisis

Quant. Easing

Fed Tapering

Sub- Prime Crisis• Prime Borrower• Sub Prime Borrower

PRIME BORROWERS

Securitization=>

SUBPRIME BORROWERS

SUBPRIME BORROWERS

SUBPRIME BORROWERS

SUBPRIME BORROWERS

TOXIC Assets TOXIC Assets

Impact on India

Impact on IndiaDollar Supply FDI-FII Exchange

RateImport Export

Sub Prime Crisis Low Out Rupee

strong (39) down

Quant. Easing

Fed Tapering

Repo. Rate / Fed. Funding Rate

Toxic Assets Sub-Prime Borrowers

Quantitative Easing (Toxic Assets + T-Bond)

(Electronic)Dollar supply

increased

OPEN MARKET OPERATION (OMO) QUANTITATIVE EASING (QE)

Central bank sells OR buys government securities (treasury bonds) from the market.

Central "buys" securities, including those TOXIC assets.

If they buy=> money supply increasedSince they're only BUYING=> money supply increased.

If they sell=> money supply decreased.QE only INCREASES money supply. QE itself cannot decrease money supply.

MONETIZING THE DEBT QUANT.EASING (QE)

Central bank purchases "securities" from government and creates more money.

Central bank purchases (toxic) "securities" from market and creates more money.

Increases the money supply in the system.

same

Toxic Asset 40 BnT-Bonds 45 Bn

Impact on IndiaDollar Supply FDI-FII Exchange

RateImport Export

Sub Prime Crisis Low Out Rupee

strong (39) Down

Quant. Easing HIGH

IncreaseHOT money

Strong09=5010=44

DownsubprimeGreece/EU

Fed Tapering

December 2012When to stop QE?

Inflation >2.5%Unemployment <6.5%

Dollar supply high:1. Hot money2. Gold expensive (850-1900)

Fed Tapering• mechanical term= Continuous reduction of width.

Impact on IndiaDollar Supply FDI-FII Exchange

Rate Export

Sub Prime Crisis Low Out Rupee

strong (39) Down

Quant. Easing HIGH

IncreaseHOT money

Strong09=5010=44

DownsubprimeGreece/EU

Fed Tapering Med. Decline

Rupee weak (60)(Good for Export)

May increase

FT Impact on India: worst case scenario1. FII run away =>Sharemarket crash (flight

of capital)2. Dollar supply decrease=> rupee weakens.3. Good for export, bad for import & ECB. 4. No boost in export from USA, EU5. BoP crisis (high CAD, low capital)

Why BoP crisis in 1991-92?1991 (Apr-Sep) Million $$

Current -6000Capital +4000

Overall Balance -2000

IMF loan +2300 GOLD pledge65 tonnes

BRICS Bank-Decision to setup $100 bn-Help member nation in crisis-Limitation: will operate from 2015

China 41

Russia 18

India 18

Brazil 18

South Africa 5

total Bn 100

Steps taken to protect against FT

NRI FCNR: interest rate hiked + swap. (+35 bn$) = Capital inflow increase

Steps taken to protect against FT (2013)

Steps taken to protect against FT (2013)Dollar swap for Oil Marketing Co. •buy $$ from RBI instead of Market•repay dollars at later date (Feb-April 2014]•= Volatility decline•“managed” float exchange regime

Currency Swap agreement with Japan (50 Bn)•RBI vs Bank of Japan•Will give each other dollars incase of speculator attack

Steps taken to protect against FT (2014)

$$ From Japan

From government’s side• FDI liberalization• Fast tracking of environment clearances• Project monitoring group

=FDI capital inflow increase.

Steps taken to protect against FT (2014)• Inflation => Real interest rate

negative => gold / real-estate.• If RBI starts Inflation targeting

=>more investment in banks and securities by locals.• FDI, FII, ECB= less dependence.

Ref. lecture 3

Mock Question• “The fears about the negative impact of Fed tapering on Indian

economy, are unfounded.” Do you agree? Justify your stand (10m | 200 words)

Mock Question“The fears about the negative impact of Fed tapering on Indian economy, are unfounded.” Do you agree? Justify your stand (10m | 200 words)

1.Term: Fed Tapering2.Impact, what?3.Fear unfounded, why?

Mock Question“The fears about negative impact of Fed tapering on Indian economy, are unfounded.” Do you agree? Justify your stand (10m | 200 words)•Fed tapering= gradual reduction in bond purchase program of US feds.Why fear (consequences /negative impact)?

•flight of capital => sharemarket collapse•Rupee weakens => CAD widens•flight of capital + CAD + Speculator attack => BoP crisis

Mock Question•Why fears unfounded?1.Fed tapering = US economy back on track = boost in import

by US firms =good news for Indian IT firms.2.BRICS bank.3.RBI’s side: FCNR reform, dollar swap for OMC, currency

swap with Japan4.Government’s side: FDI reform, fast tracking projectsAs a result (1) forex reserves are good enough to withstand

pressure (2) economy resilient and attractive for capital inflows.