Impact of quantitative easing on India

Abstract

The recent financial crises engendered contentious policy responses whose consequences have been the subject of debate off late. The term ‘Quantitative Easing’, although first used by the Bank of Japan in early 2000s, has been the hallmark of the Federal Reserve’s response to the sub-prime crisis of 2008. The unconventional and aggressive monetary stimulus reached a peak before tapering. Hence, it was not surprising to see their economies and stock markets turning extremely volatile around Ben Bernanke’s taper announcement. The impact on emerging economies, especially India, has been quite erratic. The increased capital inflows in an environment of low private investment, financed the growing current account deficit. Consequently, due to the size and liquidity of the Indian financial markets, the global investors rebalanced away from India on the taper announcement. In order to prevent India from being exposed to such vulnerabilities, the monetary policy makers should strive to develop a medium term framework centred on robust foreign exchange reserves and bilateral swap lines.