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Quantitative easing: A tool missed by RBI to bolster Indian Economy

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Quantitative easing is a tool which is used by Central Banks to buy Government bonds/Corporate bonds to bring down yields, which will help lower down interest rates to help create liquidity in markets and in turn give a boost to economy which may be the need of the hour. QE is tool which is used widely by Central banks & came more into limelight in early March 2015 when ECB launched a QE program. This was initiated by Mario Draghi (current ECB president) in light to fight low EU inflation rates & alleged recession.

While Mario Draghi retires in Oct-19 as ECB President, he will be remembered for his policies to bring EU’s economical health on track. When Draghi kicked off this plan, EU was battling multiple internal crises, but it didn’t deter Draghi to take route of QE to bring liquidity in the system. Below snap clearly shows how QE helped bringing inflation numbers up & liquidity in the market.

QE – A tool missed by RBI to bolster Indian Economy

In recent liquidity crunch which we witnessed in Indian economy can be attributed to multiple factors. One of them directs us towards inaction by RBI, which could have been handled in a better way. RBI knew liquidity crunch the financial sector is facing and is impacting negatively sectors like auto, manufacturing, etc. but still didn’t take steps towards it.

As per latest RBI response to one of my RTI about QE, they categorically responded that they haven’t exercised QE & by the response it seems that they are never going to take that as an option ever. A tool which could bring a lot of things in order. Yields for 10-year government bond is still looming around 6%, which is high and if RBI is serious in bringing the liquidity, they might have to do more than just reducing the interest rates.

 

Many critics of QE has also said that QE creates a “Moral Hazard” for the governments/central banks to artificially bring down the cost of borrowing which may not be a true indicator and would harm the economy in long run. Also, QE can never replace fiscal policy and must be looked as an independent tool to revive the economy.

Knowing that RBI has always been conservative and has been saving India from falling into recession/financial turmoil, but it’s role has been in question for quite some time now. Being a naïve investor, I would want RBI to come out strongly in its own capacity on liquidity qualms and give confidence to the market that RBI is willing to do what all it takes.

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