Quantitative Easing in the US and its effect on the Indian market.
Introduction:
The reason for the fall of the Indian currency i.e. the rupee, as pack of cards and the huge turbulence on the bond yields is Quantitative Easing (QE).
This all started in late 2008 post the Lemon Brother’s crisis. Post this crisis there was a liquidity crunch in the market. People did not have money, banks did not have money and whenever there is such a huge liquidity crunch then we would see the Central bank of the country trying to infuse money into the system and that’s what the US Central bank did.
The value of a currency, like all listed merchandise or services, depends on demand and provide. If there's additional demand of dollars within the currency market
The primary is by OMO (Open Market Operations) and also the second is by decreasing interest rates within the market. When we have a tendency once after we say reducing the interest rates we say reducing the repo and also the reverse repo rate. In Associate in nursing open market operation, the financial institution buys back the debt that's sold to banking companies and for that the financial institution pays the business bank. Hence, liquidity with the business banks will increase, the business banks can begin loaning and this may facilitate to resolve the matter of the liquidity crunch that individuals face within the
They started with Open Market Operations, which they called Quantitative Easing. They bought debt from the market, from the commercial banks typically and they paid money for that. As a result of this money supply in the market increased and the liquidity to a certain extent was somewhat taken care of. When they saw that the liquidity was infused into the market and that it was helping the markets revive, they stopped the first stage of quantitative easing. Over a period of time when they realised that the market was facing problems is when they started with quantitative easing part II (QE II) where they did the same thing that they had done in QE I i.e. bought debt from the banks, paid money to them and hence infused liquidity into the system. Over a period of time when they noticed that liquidity was infused into the market and that it was helping the markets revive, they stopped the second stage of quantitative easing. Presently what is running in the US is QE III. In QE III the US Central Bank is buying $85 billion worth of debt and hence infusing $85 billion into the market. Later, the US Federal Chief made some mentions which have had impact on the current situation. The following are a few points that he