MAHARASHTRA NATIONAL LAW UNIVERSITY MUMBAI

SEMESTER – III (FINAL DRAFT)

TERM PAPER TOWARDS FULFILMENT OF THE ASSESSMENT

IN THE SUBJECT OF ECONOMICS - III

QUANTITATIVE EASING: A CRITICAL ANALYSIS

Submitted to: PROF. ROHIT JADHAV Submitted by: PARINA MUCHHALA

(Course Instructor) Roll No.: 2017 038

 TABLE OF CONTENTS

1. Introduction ......................................................................................................................... 3

1.1 Background of the Study ................................................................................................ 5

1.2 Objectives of the Study ................................................................................................... 5

1.3 Research Question .......................................................................................................... 6

1.4 Research Hypotheses ...................................................................................................... 6

1.5 Methodology ................................................................................................................... 7

1.6 Limitations of the Study.................................................................................................. 7

2. Review of Literature ........................................................................................................... 7

3. Chapterization ................................................................................................................... 10

3.1. Towards understanding quantitative easing ................................................................. 10

3.2. Quantitative easing and central bankers: Past precedents ............................................ 14

3.2.1 Japan ....................................................................................................................... 14

3.2.2 United States of America........................................................................................ 17

3.2.3 United Kingdom ..................................................................................................... 20

3.3. The merits and demerits of quantitative easing: An Analysis ..................................... 22

3.3.1 Merits ...................................................................................................................... 22

3.3.2 Demerits ................................................................................................................. 24

4. Analyzing Indian economy and quantitative easing: Tough luck or blessing in

disguise? ................................................................................................................................. 25

4.1 Has India adopted quantitative easing?...................................................................... 26

4.2 Financial Resolution and Dispute Insurance Bill, 2017............................................. 27

5. Suitability of quantitative easing to the Indian market: A Conclusion ....................... 29

5.1 Policy Statement ........................................................................................................ 30

6. Bibliography ...................................................................................................................... 30

7. Annexure ............................................................................................................................. 35

2
 QUANTITATIVE EASING: A CRITICAL ANALYSIS

1. INTRODUCTION
1.1. BACKGROUND OF THE STUDY

Every country desires to reduce inflation. The task to do this is generally enshrined in the
hands of the central bank of a country, which regulates and prints that country’s currency.
Simply put, inflation can be defined as the rate at which the general level of prices of an
economy’s goods and services rise, which, on the other hand, perpetuate the fall of the
purchasing power of the currency of that particular country simultaneously. 1

The most influential, and

arguably the best method to
reduce inflation happens to be
through an effective control of
the monetary policy of the
country’s economy by the
central bank. A monetary
policy involves management
of money supply and interest
rate and is the demand side economic policy used by the government of a country to achieve
macroeconomic objectives like inflation, consumption, growth and liquidity. 2

Since monetary policy is essentially related to the money supply in the economy, its major
tool to control and regulate this supply is the interest rate. Interest rates are heavily influenced
by the money supply in the economy and thus form an important tool to combat inflation.
Therefore, the lower the rates, the lower is the inflation as the money credit in the market is
higher. (Labonte and Makinen, 2007)

A particularly undesirable situation emerges in front of central bankers nowadays whereby

the interest rates are close to zero. This is because the central bank is generally in the habit of

1
Hollander, Jacob H. "Inflation." The Annals of the American Academy of Political and Social Science 89
(1920): 253-57.
2
“Definition of Monetary Policy.” Economic Times. http://economictimes.indiatimes.com/definition/monetary-
policy

3
purchasing limited amounts of open market operations through any normal monetary policy.
When even the option of lowering interest rates is exhausted, what is to be done? This
situation, which is called liquidity trap,3 is particularly hazardous because it leaves no other
alternative mechanism for bankers to reduce the already prevalent high prices and low credit.

It is here where the role of quantitative easing emerges. Quantitative easing, also referred to
as large-scale asset purchases,4 is a part of the expansionary monetary policy regime wherein
a central bank buys large amounts of government bonds or other predetermined assets, which
are of a nature that can heavily influence interest rates that can increase the liquidity in the
country. These are often also brought back from private funding institutions of that country.
Once this liquidity, or money supply increases, interest rates will lower and pave the way for
increased spending by people, who shall now possess money. Eventually, this creates a
situation of low inflation, often referred to as a ‘Goldilocks economy.’ 5

Understanding quantitative easing is the need of the hour because it is a successful measure
adopted to reduce inflation in various countries such as Japan, China and the United
Kingdom. Notably, this method was adopted by the American Federal reserve to curb the
financial recession of 2007-08.6 Quantitative easing can help to maintain targeted levels of
inflation and thus keep economy under check, which is imperative during recessions. India,
surprisingly, has never adopted the quantitative easing method despite having faced various
recessions.

This paper will initially trace the history and process of conducting quantitative easing. The
second part shall examine the past instances of quantitative easing and analyse their impact
on the economies, namely USA, UK Japan and Greece. The third part comprises of a critical
analysis of the merits and demerits of this method, which is followed by a further
introspective analysis of whether Indian economy requires quantitative easing today. The
context this paper shall draw from is the prevalent economic situations in countries,
especially those that are regular victims of inflation.
3
Stewart, Heather (2009). “Quantitative easing: last resort to get credit moving again;” The Guardian. London.
Available at https://www.theguardian.com/business/2009/jan/29/question-and-answer-quantitative-easing (last
visited August 15, 2018)
4
Bernanke, Ben (2015). The Courage to Act (first ed.). New York: W.W Norton & Company. p. 418.
5
Smelt, Simon. "Regulation of Financial Markets: Panics, Moral Hazard, and the Long-term Good." Public
Policy: Why Ethics Matters, 227-56. ANU Press, 2010.
6
Klyuev, Vladimir; de Imus, Phil; Krishna Srinivasan (2009). Unconventional Choices for Unconventional
Times: Credit and Quantitative Easing in Advanced Economies (IMF Staff Position Note). Available at
http://www.imf.org/external/pubs/ft/spn/2009/spn0927.pdf (last visited August 15, 2018)

4
 1.2. OBJECTIVES OF THE STUDY

The researcher is trying to look at quantitative easing from a worm’s eye-view, so as to

properly understand and analyse the process. The ultimate aim of the researcher is to use the
existing scholarship as a means to analyse whether quantitative easing is a method suitable
for the Indian economy. It is in this regard that the researcher shall attempt to understand past
instances and effects of this method and also tries to understand the merits and demerits of
this process on an economy.

The objectives of this research include:

 To understand how quantitative easing works and why it is deemed necessary in

today’s world
 To analyse why it was adopted by various central banks in the past to alleviate
inflation
 To critique the merits and demerits of this method
 To determine, through a combination of the aforementioned objectives, whether this
method is suitable for the Indian economy

1.3. RESEARCH PROBLEM AND QUESTION

India is a country that has been facing inflation since many years now. It was most recently
affected by a ghastly recession in 2008. In this regard, it becomes inevitable to understand
monetary policies adopted by the RBI. Since quantitative easing is a method made use of in
similar situations, it requires critical analysis so as to determine its relevance and suitability,
if any, in India and other developing economies.

Existing literature on this topic, although varied and comprehensive, is only enough for the
researcher to understand the method of quantitative easing. However, it has an inherent
lacuna whereby it does not deal with understanding the relevance of quantitative easing to
developing countries that have not adopted it yet. In this regard, the researcher believes that
the adoption of an integrative approach, which shall begin with a general overview of
quantitative easing and move on to a narrower analysis specific to India would yield to
maximum scholarship of research and also cater to the paper titled ‘Indian Economy.’ This is
mainly to be done by adopting a more broad economic analysis which consolidates the views

5
and theories of various economists and thinkers and subsequently add to the existing
scholarship of literature by adding a new dimension to interpretation.

This research seeks to answer the following question:

I. Why do central bankers tend to adopt quantitative easing and how effective is this
mechanism?
II. If adopted, would quantitative easing help to solve the problem of inflation in India
and to what extent?

1.4. RESEARCH HYPOTHESES

Quantitative easing is the need of the hour for most economies undergoing inflation and in
dire need of increased money supply. However, since this research will move chronologically
towards understanding this method through a critical analysis, it still hypothesizes that
quantitative easing may not be the best method for the Indian economy due to its nature,
currency value, and policy targets. The money supply situation in India differs vastly from
the countries that have already adopted quantitative easing and hence it cannot be ascertained,
for sure, that this method shall prove to be as effective even to curb Indian inflation.

1.5. METHODOLOGY

For conducting this research, the researcher has relied entirely on the Arm Chair method of
research, which focuses on collection of secondary data mainly through sources like books,
articles, economic reports, websites, and newspaper reports.

1. For understanding the method and procedure followed in quantitative easing, the
researcher has referred to various online economic blogs, which explained the concept
in layman language and helped her understand the basics.
2. Once the basics were understood, the researcher moved on to refer to various
economic reports, IMF concept notes and research articles that help to understand
why quantitative easing was adopted by countries in the past and what effects it had
on the economy. Few newspaper reports were also examined in this regard.
3. After this, the researcher shall herself try to understand the merits and demerits of
quantitative easing with the help of various online web links and scholarly articles on
economic blogs.

6
 4. Lastly, to prove/disprove the hypotheses presumed, the researcher combines these
methodologies to gain a more holistic understanding and conclude the research more
fruitfully. This is because the critical analysis with respect to India shall require
examination of books, websites, research articles, and self analysis so as to arrive at
the correct conclusion.

1.6. LIMITATIONS OF THE STUDY

This research is prone to certain limitations. Since this paper is related to the Indian economy,
the research shall be centred on the focus of identifying the relevance and suitability of
quantitative easing to the Indian economy. The researcher makes no attempts to specifically
analyse the impact of quantitative easing in any other country, but will only try to determine
its positives through thorough reading. The overview adopted is broader and not highly
specific. The time period for this research ranges from mid 20th century to the present day.
Lastly, owing to paucity of time and connections, this research is solely limited to the use of
secondary data.

2. REVIEW OF LITERATURE
In economic literature catering to the specific topic of quantitative easing, there is no paucity
of scholarship with respect to understanding how this phenomenon works. There is also no
scarcity of literature analysing the effects of quantitative easing for countries that have
already implemented it. However, literature connecting quantitative easing and the Indian
economy is scant.

Through careful scrutiny of this available literature, scholars can broadly be categorised into
the following two stands of research: the first strand, belongs only to those who understand
plainly the concept and merits of quantitative easing. (Ertürk7 and Hager8) The second

7
Ertürk, Ismail. "Reconceptualizing Central Bank Unconventional Policies: Long Positions On No-Growth
Capitalism." Central Banking at a Crossroads: Europe and Beyond, 217-28. London: Anthem Press, 2014.
8
Hager, Sandy Brian. "Bonding Domestic and Foreign Owners." In Public Debt, Inequality, and Power: The
Making of a Modern Debt State, 70-82. Oakland, California: University of California Press, 2016.

7
strand of economic researchers base their analysis on trying to ascertain the impact of
quantitative easing in specific countries. (Tyers, Zhang and Cheong,9 Mellor10)

Henceforth, the review of literature moves chronologically. Although a stringent review does
not fall directly under the scope of this topic, there thankfully exists a sizeable portion of
literature dealing with various individualised segments of quantitative easing. This section
presents a brief review of prominent studies carried out by researchers in India and abroad.
Since quantitative easing has not been adopted in India yet, scholars writing about this topic
are from the west, mainly Europe and USA, and most of the articles are as recent as June
2017.

Sheard (2007)11 is one of the few scholars to examine the impact of quantitative easing on
Japan. This article is extremely useful for the researcher because Japan is the first country to
adopt quantitative easing, and thus it analyses the reasons why this method succeeded in
Japan and how it managed to entice other countries dealing with inflation. Talking
specifically about the Japanese economy, Sheard argues that Japan’s prolonged deflation in
the post-bubble period was largely a ‘policy story’ which emerged due to mishandling of
crisis by the centre. Deeming this relevant to his understanding of the future of the Japanese
economy, he believes that this policy of quantitative easing was not highly successful, rather,
led to forbearance and weakened Japan’s position as a key player in the Asian economic
market.

Blinder (2010)12 writes in 2010, during the ongoing quantitative easing strategy already in
place by the American Federal Reserve. Therefore, his article assumes a predictive nature
which tries to determine, through the present situation and immediate response of the
American economy, whether the quantitative easing strategy would succeed. Through
extensive empirical analysis of the federal reports in this regard, Blinder emphatically blames
Ben Bernanke, the then federal bank head, concludes that the quantitative easing strategy
would destroy the American economy.
9
Tyers, Rod, Ying Zhang, and Tsun Se Cheong. "China’s Saving and Global Economic Performance."
In China: A New Model for Growth and Development, 97-124. ANU Press, 2013.
10
Mellor, Mary. "The Financial Crisis Of 2007–08." In The Future of Money: From Financial Crisis to Public
Resource, 109-30. London: Pluto Press, 2010.
11
Sheard, Paul. "The Japanese Economy: Where Is It Leading In The Asia Pacific? Anatomy Of An Abnormal
Economy And Policy Failure." In Japan's Future in East Asia and the Pacific, 1-30. Canberra: ANU Press,
2007.
12
Blinder, Alan S. "Quantitative easing: entrance and exit strategies." Federal Reserve Bank of St. Louis
Review 92, no. 6 (2010): 465-479.

8
Joyce, Miles, Scott and Vayanos (2012)13 assess the impact of quantitative easing and other
unconventional monetary policies followed by central banks in the wake of the financial
crisis that began in 2007. They critically assess the wake of the housing crisis in light of an
already volatile American economy, through the implications post collapse of Lehman
Brothers. Through extensive empirical studies, they conclude that asset purchase models,
such as quantitative easing, have various negative consequences. This article is fundamental
to this research because it brings to light the darker, less known negative side of quantitative
easing.

Lyonnet and Werner (2012)14 investigate, through illustrative empirical analysis of apex
bank reports, the effectiveness of the quantitative easing policy in the United Kingdom. They
measure this by its impact on the declared goal of the policy (nominal GDP growth.) This
paper is highly unique and very important to this research because the researchers use the
general-to-specific econometric modelling methodology in order to determine the relative
importance of Bank of England policies. They concluded, using empirical analysis, that QE
as defined and announced in March 2009 had no apparent effect on the UK economy.

Martin and Milas (2012)15 draw two main conclusions via reading of the evidence related to
quantitative easing. First, they argue that large-scale asset purchases reduce government bond
rates. However, this effect may be temporary and is small if bond rates are already low, while
initial waves of quantitative easing are more effective than subsequent programmes. Second,
quantitative easing appears to have been effective in late 2008 and 2009, preventing even
larger declines in output and inflation than were experienced. Despite appearing to be in
favour of quantitative easing, they still argue for a new method to conduct quantitative easing
at the end of their article.

Fawley and Needy (2013)16 describe the circumstances of and motivations for the
quantitative easing programs of the Federal Reserve, Bank of England, European Central
Bank, and Bank of Japan during the 2007-08 recession. It is a highly compelling, important

13
Joyce, Michael, David Miles, Andrew Scott, and Dimitri Vayanos. "Quantitative easing and unconventional
monetary policy–an introduction." The Economic Journal 122, no. 564 (2012): F271-F288.
14
Lyonnet, Victor, and Richard Werner. "Lessons from the Bank of England on ‘quantitative easing’ and other
‘unconventional’ monetary policies." International Review of Financial Analysis 25 (2012): 94-105.
15
Martin, Christopher, and Costas Milas. "Quantitative Easing: A Sceptical Survey." Oxford Review of
Economic Policy 28, no. 4 (2012): 750-64
16
Fawley, Brett W. and Neely, Christopher J. “Four stories of Quantitative Easing” Federal Reserve Bank of St.
Louis Review, January/February 2013, 95(1), pp. 51-88.

9
article because it is the only one that provides a comparative overview of the quantitative
easing policies across all four banks. Through extensive empirical research, the authors
conclude that this policy had the desired effects on asset prices but the effects on the broader
economy are much more difficult to discern because it is not possible to know with any
certainty how economic conditions would have evolved without these policies in place.

Singh’s (2014)17 research is important because he provides a much needed Indian perspective
to this research. Although the article is mainly related to collateral and its effects on monetary
policy, he concludes that the larger the quantitative easing efforts, the longer the central
banks will impact the collateral market and associated repo rate. This may have monetary
policy and financial-stability implications since the repo rates map the financial landscape
that straddles the bank/non-bank nexus. He cites the examples of the American Federal
Reserve and the European Central Bank (ECB) to substantiate his argument.

Drahos (2017)18 adds a new dimension to this research by writing mainly about capitalism
and the effect of state and non-state actors on determining the monetary policy of the country.
Although most of what he writes is not directly connected to quantitative easing, he shares
the opinion that the evolution of independent institutions of central banking is perhaps the
single most important regulatory accomplishment of financial capitalism, coming to this
conclusion by looking at the successful quantitative easing carried out by England and USA.

3. CHAPTERIZATION

3.1. TOWARDS UNDERSTANDING QUANTITATIVE EASING

Every central bank has two major tools to control inflation in a country. The first one, often
called the conventional method, is referred to as the ‘federal funds rate’ in the USA. This is
the interbank rate at which banks lend to each other. Indian economy does not have an exact
equivalent of this rate; however, it has a repo rate, or the rate at which the RBI lends money
to the bank against securities which is used conventionally. 19 Generally, a control of any

17
Singh, Manmohan. "Collateral and Monetary Policy." Central Banking at a Crossroads: Europe and Beyond,
143-56. London; New York, NY: Anthem Press, 2014.
18
Drahos, Peter. "Regulating Capitalism’s Processes of Destruction." Regulatory Theory: Foundations and
Applications, 761-84. Acton ACT, Australia: ANU Press, 2017.
19
Mridusmita. “Quantitative Easing: Demysitified.” Economyria. Available at
http://economyria.com/quantitative-easing-demystified/ (last visited August 15, 2018)

10
situation that could potentially pave the way for inflation is done through active regulation of
this rate. The logic behind this is simple: the interest rate influences entrepreneurs to take
credit and people to deposit money. Hence, the interest rate is the prima facie influencer of
money supply. Since money supply is directly related to the phenomenon of price rise and
subsequently inflation, this becomes the first tool of choice for central bankers.

However, in light of an unexpected liquidity trap that can arise sometimes and hamper the
economy, the second unconventional tool, quantitative easing, is used. A liquidity trap is a
situation where the interest rates in an economy are close to zero but are still unable to attract
any significant money supply in the economy. This is either because people are scared to take
loans or banks are maintaining higher reserves. This creates a problem of excessive reserves
vis-a-vis low credit, and hence higher prices and more inflation. So, prices rise and inflation
automatically rises. This is when quantitative easing enters the minds of central bankers.

Quantitative easing is an injection of cash into an economy’s banking system to stimulate

lending during such times of excessive inflation or recession. 20 A central bank popularly
enacts quantitative easing by purchasing, no matter how low the interest rate, a
preset quantity of bonds or other financial assets from private financial institutions. Common
examples of such securities include government bonds issued to the public.

The goal of such a policy is to ease financial conditions and facilitate an expansion of private
bank lending; because if private banks increase lending, it would increase the overall money
supply.21 When the central bank pumps excessive money into the economy by buying back
securities and other open market operations, what it essentially does is that it tries to bridge
the gap between the excess reserves and the lower money supply in the economy. 22 The
amount of money added in the economy is equal exactly to the amount that the central bank
estimates is in the bank reserves. This provides a further impetus for banks to give loans and
thus kick start the economy again. When personal income of the people rises, the price levels
shall fall down and inflation reduces. Additionally, if the central bank also purchases
financial instruments that are riskier than government bonds, it can also lower the interest

20
Mridusmita. “Quantitative Easing: Demysitified.” Economyria. Available at
http://economyria.com/quantitative-easing-demystified/ (last visited August 15, 2018)
21
Kenourgios, Dimitris, Stephanos Papadamou, and Dimitrios Dimitriou. "On quantitative easing and high
frequency exchange rate dynamics." Research in International Business and Finance 34 (2015): 110-125.
22
Christensen, Jens H.E., and Signe Krogstrup. "Transmission of quantitative easing: The role of central bank
reserves." The Economic Journal (2015)

11
yield of those assets. As those assets are scarcer in the market, their prices go up
correspondingly.23 When this happens, inflation essentially falls. This is the major principle
underlying quantitative easing.

Quantitative easing was first used by the Bank of Japan in 2001, owing to excessive currency
slump and inflation. After this, quantitative easing became prevalent became during the 2008
worldwide recession, when the American Federal Reserve issued three mega rounds of
quantitative easing. The latest countries to adopt it include the United Kingdom in 2009 and
Greece, during the recent bailout crisis.24 The reasons why this method was adopted and its
effects on the respective economies have been discussed subsequently.

Source: Thumalla, Kumar. “QE and Tapering.” SlideShare. Available at

https://www.slideshare.net/kumarthumalla/qe-tapering (last visited August 19, 2018)

The aforementioned graph describes the quantitative easing process enacted by the Bank of
England in 2009.

23
Hadas, Edward and Hugo Dixon. "Quantitative easing: A therapy of last resort". The New York Times.
Available at https://www.nytimes.com/2009/01/11/business/worldbusiness/11iht-views12.1.19248009.html
(last visited August 18, 2018)
24
Allen, Katie. “Quantitative easing around the world: Lessons from Japan, UK, US.” The Guardian. Jan 22,
2015. Available at https://www.theguardian.com/business/2015/jan/22/quantitative-easing-around-the-world-
lessons-from-japan-uk-and-us (last visited August 18, 2018)

12
The following chronological chart, prepared by the researcher, demonstrates lucidly, in three
parts, the process of quantitative easing. The researcher has referred to various sources to
combine this data, and therefore, there is no singly citation that can be attributed to any of the
given points:

Part 1: Understanding the economy and money supply

 Money supply is the total amount of money in an economy, which is regulated by

central banks.
 The money supply of a country consists broadly of two components – cash (banknotes
and coins) and credit (loans issued by banks).
 Every country has a specified reserve ratio, which is the amount banks are required to
set aside in case of excessive withdrawals by customers.
 Reserve Ratio puts a limit on the maximum amount of loans banks can create: for every
rupee in cash reserves, they can lend 1/10% = 10x. This number is called Money
Multiplier. Therefore, total money supply can be expressed as Monetary Base x Money
Multiplier. In modern economy, Central Banks can change money supply by managing
these two components.
 Understanding this provides the much needed background to ascertain why quantitative
easing is relevant.

Part 2: Quantitative easing

 During financial crisis, inflation typically rises. Due to this, banks reduce the credit,
which creates deflation. Thus the economy is perpetuated into a never ending cycle
between inflation and deflation. Even lowering interest rates do not help the economy.
 The central bank therefore decides to increase the monetary base by pumping money
into the economy. This is done, as illustrated above, by buying back securities
regardless of interest rates.
 The hope behind quantitative easing is that banks, flushed with extra cash, will more
actively seek profitable opportunities to loan it, eventually recovering money multiplier.
This shall reduce the inflation or deflation prevalent and lead to a healthy economy.
13
 3.2. QUANTITATIVE EASING AND CENTRAL BANKERS: PAST PRECEDENTS

Quantitative easing has recently seen a new wave of popularity, with major developing
economies like Japan, USA and UK adopting it. This method was also adopted by the
European Central Bank recently in Greece to ensure that the bailout had the desired impact.

3.2.1. JAPAN

After a slow start to reforming the banking system, Japanese authorities were forced to speed
up recovery efforts after the banking crisis of 1997–1998. The crisis, stemming from non-
performing loans and damaged balance sheets, was catered to by the Bank of Japan in the
early 2000s through quantitative easing.25 Japan is considered as the first country and the
father of quantitative easing. Milton Friedman, major economist of the monetarist school of
thought, has always advocated quantitative easing.26

The Bank of Japan first introduced quantitative easing in March 2001 when it began
purchasing Japanese government bonds back from people and private financial institutions.
The apex bank filled commercial banks with excess liquidity to encourage private lending,
leaving them with large stocks of excess reserves and therefore little risk of a liquidity
shortage.27 In adherence to the core principle of quantitative easing, the bank bought back
more government bonds than would be required to set the interest rate to zero, that is, more
than required to reduce the liquidity trap. (Shirai, 2013)

In the second phase of quantitative easing, the Bank of Japan bought asset - backed
securities and extended the terms of its commercial paper-purchasing operation. This led to a
remarkable increase in the commercial bank current account balances from 5 trillion yen to
35 trillion over the next four years. They also tripled the quantity of long-term Japan

25
Ashworth, David. 2015. “Japan’s lost decade(s): What bubbles can do to an economy.” MarketRealist.
Available at https://marketrealist.com/2015/05/japans-lost-decades-bubbles-can-economy (last visited August
19, 2018)
26
Smith, Noah. 2012. “Did quantitative easing do any good?” Japan Times. Available at
https://www.japantimes.co.jp/opinion/2017/09/28/commentary/world-commentary/quantitative-easing-
good/#.W3llyugzbIU (last visited August 19, 2018)
27
Ashworth, David. 2015. “Japan’s lost decade(s): What bubbles can do to an economy.” MarketRealist.
Available at https://marketrealist.com/2015/05/japans-lost-decades-bubbles-can-economy (last visited August
19, 2018)

14
government bonds purchased on a monthly basis. This continued until March 2006 when the
Japanese economy started showing signs of exiting deflation. 28

After this, quantitative easing was not adopted again by Japan. When Japan was plagued by
the global financial crisis in 2008, deflation and de-growth was rampant in Japan. To counter
this, the Bank of Japan, instead of using quantitative easing, made use of the CME
(comprehensive monetary easing) method.

Source: Pilkington, Philip. “Effects of quantitative easing on Japan.” Shareholders United Online Forum.
Available at http://shareholdersunite.com/mybb/showthread.php?tid=3194 (last visited August 19, 2018)

Impact on Japanese economy

Each of the three phases of quantitative easing in Japan had their own different effects:

 As regards the first phase of quantitative easing in 2001, within just two years, the Bank
of Japan had expanded its monetary policy base by 60% in an attempt to stimulate the
nation’s stagnant economy. This led to a marked increase in the consumer price index
(CPI) of Japan and was subsequently ended. However, the increase in Japan’s monetary
base was not matched by any significant change in trend of the broad money supply, M2,
while bank lending declined by close to 10 percent over the period 2001–06. Therefore,
the first phase of quantitative easing was highly premature. Despite this initial setback,

28
Allen, Katie. “Quantitative easing around the world: Lessons from Japan, UK, US.” The Guardian. Jan 22,
2015. Available at https://www.theguardian.com/business/2015/jan/22/quantitative-easing-around-the-world-
lessons-from-japan-uk-and-us (last visited August 18, 2018)

15
 the policy started to have some success when stock prices increased by 57 percent
between May 2005 and April 2006. The economy also started performing better,
demonstrating steady increases in real GDP during the six quarters from 2005’s first
quarter up until 2006.29

 The second phase too was unable to resolve the existing problem. The maturing of
securities purchased by the Bank of Japan reduced the balance sheet abruptly from 152
trillion yen in March 2006 to just 114 trillion yen, and by 38 trillion yen by the end of
June 2006. The economy grew till 2008’s first quarter, with only two negative quarters of
real GDP growth before the 2008 global recession. Inflation, too, increased to 0.9 percent
year-on-year by August 2006 and remained in positive territory until February 2007. 30

 The third phase, renamed to QQE (Qualitative and Quantitative Easing) cannot be
thoroughly assessed as it is still being implemented. Despite this, a mere cursory
understanding reveals that bank credit has actually contracted so far as the decline in
commercial bank holdings of securities (due to prior quantitative easing) has exceeded the
increase in their lending.31

This analysis hence reveals that quantitative easing has had a slightly insignificant impact on
Japanese economy. While this may be attributable to the modes measures adopted by the
Bank of Japan, this is not enough to justify the apparent ineffectiveness of this
unconventional method.

29
Greenwood, John. “The Japanese experience with QE and QQE.” Cato Journal, Vol. 37, No. 1 (Winter 2017)
30
Ibid.
31
Ibid.

16
Source: Taylor, D.H. “Quantitative easing has failed in Japan and that is a great opportunity for traders.”
Seeking Alpha. Available at https://seekingalpha.com/article/4075822-qe-failed-japan-great-opportunity-
traders (last visited August 19, 2018)

3.2.2. UNITED STATES OF AMERICA

To trace quantitative easing, it is important to briefly revisit the economic recession of 2008.
This is because the 2008 recession left the American economy in ruins and the central
bankers of the country in a whole new dilemma.

The financial meltdown of 2008, originating from the United States of America was a result
of the inability of the Federal Reserve (then headed by Alan Greenspan) to regulate the
excessive liquidity with the banks and the real estate sector. Banks in America had lots of idle
cash due to the phenomenon of yen carry trade, prevalent from 2004-2008. Keen on short
term gains, the American banks started providing easy loans to unemployed people under the
“subprime” category – which just had a comparatively higher rate of interest. Carried away
by herd mentality, unemployed Americans also started taking hefty loans to finance their
houses, creating a bubble of loans that, in actuality, could not be repayed. Subsequently,
property prices rose in the country, and when markets reached an all-time low, these prices
dropped. Scared of losing more money, people tried to sell their property at obscenely low
prices, because of which various lending mechanisms such as banks became bankrupt. 32

This crisis brought down with it the investment banks, insurance companies, commercial
banks, mortgage lenders, and a number of companies who relied on credit. This is when the
American Federal Reserve (Fed), then headed by Ben Bernanke, decided to implement
quantitative easing in three ‘rounds.’ This strategy is different from Japan’s, who added
‘phases’ depending upon the changing times. The American quantitative easing procedure
was more planned and systematic in this regard.

The first round of quantitative easing (QE1) was initiated in November 2008, in the wake of
the financial crisis. The Fed projected to buy $100 billion of agency debt and $500 billion of
mortgage - backed securities. Another $850 billion was spent to buy additional debt.

32
The following information is a part of excerpts from a tete-a-tete with Dr. Prabhat Iyer, economist with the
EXIM Bank, and Mr. Hiten Muchhala, adjunct professor of Strategy at SP Jain Global School of Management.

17
Moreover, the Fed channelled another $300 billion into longer-dated treasuries to increase
debt taking capacity of the bank.33

In November 2010, America witnessed the rise of quantitative easing round 2 (QE2),
whereby the bank decided to buy back $600 billion worth of longer-dated treasuries (mainly
bonds). In September 2011, the Fed also announced the advent of a new maturity extension
program called Operation Twist, aiming to increase the average maturity of the bank’s
treasury portfolio. In furtherance of this plan, $400 billion worth of treasuries with maturities
between 72 and 360 months were purchased back, and an equal amount of treasuries that had
maturities in the 3-36 month range were sold off.34 This is in sync with the basic principle of
quantitative easing of injecting credit equivalent to the bad credit bought back by the central
bank.

When quantitative easing round 3 (QE3) was announced in September 2012, nearly $40
billion per month was to be spent in mortgage-backed securities. This, along with Operation
Twist, was supposed to account for $85 billion worth of long-term bond purchases. Once it
was observed that the economy was healing from the disastrous effects of the recession,
quantitative easing was withdrawn through an official notification by Janet Yellen in October
2014.35

Impact on American economy

Source: R.A., A.C.M. & L.P. 2014.

“The end of quantitative easing in
America.” The Economist. Available at
https://www.economist.com/graphic-
detail/2014/10/31/qe-rip (last visited
August 19, 2018)

33
Trefis Team. 2015. “Quantitative Easing in focus: The U.S. Experience.” Forbes. Available at
https://www.forbes.com/sites/greatspeculations/2015/11/16/quantitative-easing-in-focus-the-u-s-
experience/#394e9c79528d (last visited August 20, 2018)
34
Ibid.
35
Mellor, Mary. "The Financial Crisis Of 2007–08." In The Future of Money: From Financial Crisis to Public
Resource, 109-30. London: Pluto Press, 2010.

18
 Source: Klyuev, Vladimir; de Imus, Phil;
Krishna Srinivasan (2009). Unconventional
Choices for Unconventional Times: Credit and
Quantitative Easing in Advanced Economies
(IMF Staff Position Note). Available at
http://www.imf.org/external/pubs/ft/spn/2009/
://www.imf.org/external/pubs/ft/spn/2009/
spn0927.pdf (last visited August 15, 2018)

The two graphs shown above describe two significant impacts of quantitative easing on the
American economy.
y. The first graph depicts the difference in yields between nominal and
inflation-protected
protected treasury bonds, while the second one shows how various peripheral
factors, such as inflation, real asset price and consumer price levels were affected by
quantitative easing.

Since economic growth and the unemployment rate, two of the critical factors to assess
successfulness of quantitative easing have substantially improved, some economists argue
that it was successful. Empirical evidence (Forbes Trebis Team, 2013) reveals that it has
lowered nominal interest rates on different financial instruments. Proponents like Ben
Bernanke write that quantitative easing was responsible for increasing economic activity by
3%, and adding close to 2 million jobs in the private se
sector,
ctor, recovery in housing sales, car
sales, business expansion, etc.36

The other stream of economic thought believes that quantitative easing was unsuccessful in
recovery of American economy from the financial crisis. This is mainly because the economy
has not reached the stage that it was at during the pre
pre-crisis
crisis period, in spite of such a powerful
stimulus working on it. Quantitative easing, rather, punished ‘good behaviour’ of the older
generations who had saved their money, because careless borrowers hav
havee benefited highly
from the buyback schemes implemented during this method.37

36
Bernanke, Ben S. "Opening remarks: monetary policy since the onset of the crisis." In Proceedings:
Economic Policy Symposium Jackson Hole,
Hole pp. 1-22. 2012.
37
da Cunha, Paulo Vieira. "A Lurch But Not A Fall." Americas Quarterly 3, no. 1 (2009): 35-39.
39.

19
In conclusion, while it is reasonable established that quantitative easing has been effective in
sailing America through the recession, it could very well have unhealthy consequences for
the global financial system. Therefore, the impact of quantitative easing must be closely
observed and established over a much longer course of time.

Impact on Indian economy38

Most of the capital inflows in India after 2008 were a result of quantitative easing. It put lots
of money in the hands of investors and they preferred to invest it in emerging nations like
India. Thus, there was a subsequent shift of capital outside India. The Rupee declined to new
lows because as investors shifted their money from India to the USA, the demand for rupee
decreased with respect to the dollar.

With regard to other emerging economies affected by the recession across the world, India
was one of the worst affected. Since our magnanimous current account deficit (CAD) was
dependent on FIIs for capital, its reversal shocked the economy.

During the last phase of quantitative easing, when the American Federal Reserve began to
actually scale back the program, it didn’t have much impact as India’s macroeconomic
fundamentals had improved substantially. Thus, growth had returned to normal and inflation
had finally steadied. The American quantitative easing programme did not have any effect on
India subsequently.

3.2.2. UNITED KINGDOM

It is important to note, before attempting to understand quantitative easing in UK, that this
was a reactionary measure undertaken in light of the pervasive effects of the 2008 financial
crisis that emerged in America. The Bank of England launched a quantitative easing
programme in March 2009 with an initial spending target of 75 billion pounds over three
months. Simultaneously, interest rates were cut down to a record low of 0.5%.

Between March 2009 and January 2010, the Bank further purchased 200 billion pounds39 of
assets, equivalent to about 14% of GDP, so as to boost the English economy. October 2011,
faced with growing warnings of a double-dip recession and a plausible Eurozone crisis, led to

38
Mridusmita. “Quantitative Easing: Demysitified.” Economyria. Available at
http://economyria.com/quantitative-easing-demystified/ (last visited August 15, 2018)
39
Joyce, Michael, Ana Lasaosa, Ibrahim Stevens, and Matthew Tong. "The financial market impact of
quantitative easing in the United Kingdom." International Journal of Central Banking7, no. 3 (2011): 113-161.

20
another round of quantitative easing which was symbolized by pumping of an additional 75
billion pounds into the financial system. Thus, the total budget envisaged during quantitative
easing was 275 billion pounds which, through the course of events, was increased to 375
billion pounds.40

Source: Pettinger, Tejvan. “UK Inflation rate and graphs.” Economics Help. Available at
https://www.economicshelp.org/blog/5720/economics/inflation
https://www.economicshelp.org/blog/5720/economics/inflation-stats-and-graphs/ (last visited August 15, 2018)

Impact on United Kingdom’s economy

The major negative impact of quantitative easing on United Kingdom was that while the
Bank of England was printing out money, the government was running out of money. From
2010 onwards,
ds, projects to build schools, flood defence projects, roads and other job-creating
job
ventures were struck down. Instead of using some of this new money to create jobs it was
flooded into and trapped in the financial markets. A colossal percentage of construction
constru
workers were now unemployed with no work and nothing to do – these people would have
cost less than 1 billion pounds to employ. Every 1 pound invested in the QE program grew
the economy by just 8p.

The United Kingdom is currently stuck in a low infl

inflation
ation trap, and the monetary policy tools
are not of much use, considering that interest rates are almost at 0%. This creates a
paradoxical situation where reducing quantitative easing will only decrease spending, growth

40
Allen, Katie. “Quantitative easing around the
th world: Lessons from Japan, UK, US.” The Guardian. Jan 22,
2015. Available at https://www.theguardian.com/business/2015/jan/22/quantitative-easing-around
https://www.theguardian.com/business/2015/jan/22/quantitative around-the-world-
lessons-from-japan-uk-and-usus (last visited August 18, 2018)

21
and reduce inflation, increasing it will increase debt, and keeping it at current levels will not
bring up inflation anywhere near the bank’s 2% target rate.41

Source: Meier, André. Panacea,

curse, or nonevent? Unconventional
monetary policy in the United
Kingdom. No. 9-163. International
Monetary Fund, 2009.

3.3. THE MERITS AND DEMERITS OF QUANTITATIVE EASING: AN

ANALYSIS

3.3.1. MERITS42

Through an observation of the process of quantitative easing that has already been
implemented in the aforementioned countries, the following merits/advantages can be
established:

 The fundamental merit of quantitative easing is that it increases the money supply of an
economy. This subsequently reduces interest rates, because excess money starts flowing
into the system, making lenders compete with each other just to lend that excess money.
In the process of this competition, they drag the interest rates down. Hence, quantitative

41
Baider, Laith. 2016. “The failure of quantitative easing in the UK.” Market Mogul. Available at
https://themarketmogul.com/failure-quantitative-easing-uk/ (last visited August 16, 2018)
42
“Advantages of quantitative easing.” Management Study Guide. Available at
https://www.managementstudyguide.com/advantages-of-quantitative-easing.htm (last visited August 18, 2018)

22
 easing as a tool becomes twice as effective as regards the conventional monetary policy
tools. The boom phase hence becomes bigger.

 Quantitative easing helps to reduce unemployment. This policy has ensured that the
employment rates do not fall down so drastically so stay down for so long. Hence, in the
short run, the policy of quantitative easing has been extremely beneficial to the average
person because it has protected their jobs. Otherwise, the crisis of 2008 was enough to
create a prolonged period of unemployment. A stark example of this is America, which
was able to secure 40% employment for its citizens through quantitative easing. 43

 In quantitative easing, assets are bought back from the open market. These assets are
usually government bonds because they tend to be the safest method to increase market
liquidity. Central banks generally buy back toxic assets as well, and continue to retain
them until a better situation in the economy is reached. This drains the toxic assets out of
the system and puts them in closed vaults of the central bank. Once the crisis begins to
resolve itself, these toxic assets are slowly released into the economy wherein they can be
quickly absorbed and do not disturb the equilibrium of the entire economy. Therefore,
quantitative easing is the only mechanism that is able to successfully and positively deal
with toxic assets without disrupting the economy.

 While quantitative easing is undertaken, government has virtually 100% control over the
outcomes. Since central bankers are buying bonds, they know the exact amount of money
that they are circulating in the marketplace and how it will affect employment, consumer
confidence and the economy as a whole. These perceived benefits are what make
quantitative easing one of the most preferred methods of monetary interference by the
Central Banks today.

If we cumulatively read all this, we can briefly understand that quantitative easing is one of
the most successful short term strategies to bring a country out of slowdown. However, since
central bankers are also concerned with the long term health of an economy, it is also
important to determine whether this method has the same long term effects as well, and if it
has any demerits.

43
Ali, Abdulmalik. "Quantitative Monetary Easing: The history and impacts on financial markets.” Available at
https://www.academia.edu/6943181/Quantitative_Monetary_Easing_-
_the_history_and_impacts_on_financial_markets (last visited August 20, 2018)

23
 3.3.2. DEMERITS44

 The goal of the central banks is to keep inflation at the lowest and healthiest level
possible. However, the policy of quantitative easing does the exact opposite. Since this
policy creates money and uses this money to further intensify lending by using this
money as reserves, it is inherently inflationary. Economic policy, on the basis of
empirical evidence that is gathered from the countries that have previously implemented
this, suggests that quantitative easing will be used in a depressed economy and therefore
the first effects of inflation will be good as they will stimulate the economy. The later
effects of such stimulation will be difficult to manage when the economy recovers.
Therefore it is highly likely that quantitative easing solves one problem but creates
another in the next few years. It is therefore only a temporary quick fix and not a long
term solution.

 Quantitative easing brings about a fall in the interest rates in the short run. However, in
the long run it leads to inflation which causes the interest rates to rise causing the exact
opposite of financial stability. Therefore, critics of quantitative easing believe that it is a
disruptive policy that creates negative effects in the economy.

 It is argued that the culprit behind creation of the business cycles is quantitative easing.
Since this phenomenon creates easy money in the economy, lenders compete to lend
money and often end up lending this money to people who aren’t interested in it in the
first place. Therefore, the policy of quantitative easing first creates an apparent boom, or
growth period. However, later the same monetary policy leads to deleveraging by the
banks. This is because when quantitative easing stops, money becomes tight. This causes
banks to call in their loans and as a result businesses start contracting and recession
begins. Therefore, quantitative easing creates a paradox whereby it initiates the thing it
was supposed to curb in the first place. As though in response, employment rates also
dwindle.

 Abundance of money always creates bubbles in the asset markets. Higher salaries and
higher profits always find their way into these markets raising the prices of assets that are

44
“Disadvantages of quantitative easing.” Management Study Guide. Available at
https://www.managementstudyguide.com/disadvantages-of-quantitative-easing.htm (last visited August 18,
2018)

24
 traded in them. Therefore the policy of quantitative easing leads to asset bubble formation
in the market. Once again, the market, like the economy in general becomes hooked to the
increasing amounts of monetary stimulus that are received on a day to day basis and once
this stimulus stops people start pulling their money out of the markets causing the prices
to crash. Thus, the policy of quantitative easing could lead to an increase as well a sudden
crash in the market prices bringing about huge transfers of wealth. The theory of
quantitative easing is therefore relatively untested.

On cumulative understanding of the demerits it is observed that quantitative easing is not at

all suitable for economies in the long run.

Source: “Quantitative easing UK.”

SlideServe. Available at
https://www.slideserve.com/glenda/quant
itative-easing-uk (last visited August 19,
2018)

4. ANALYZING INDIAN ECONOMY AND QUANTITATIVE EASING: TOUGH

LUCK OR BLESSING IN DISGUISE?

After thoroughly understanding the procedure of quantitative easing and overall merits,
demerits and impact on an economy, it is now important to move to the question of
ascertaining whether this method is suitable for the Indian economy. Extensive literature in
this regard is not available, however newspaper opinion reports, written by economists and
researchers alike, are the only source for the same.

First, we must understand what the disadvantages of quantitative easing are and how they
specifically cause problems to the Indian economy. Secondly, we must appreciate and
acknowledge the unique characteristics of the Indian currency and economy itself. A

25
combination of the two worldviews shall help us understand whether India has adopted
quantitative easing, and if so, upto what extent.

4.1 HAS INDIA ADOPTED QUANTITATIVE EASING?

The answer to this question is both yes and no. The subjectivity of this answer lies in the
ambiguity and the subsequent interpretation of the word ‘quantitative easing itself.’

As regards scholars and researchers who believe that India has adopted quantitative easing,
they argue that since purchase of open market operations (OMO) is a vital part of this
phenomenon, it can be logically deduced that India follows quantitative easing. The RBI has
been buying government bonds through OMO bond purchase auctions since 2008-09. In the
last six years, till the second half of January 2014, RBI has bought Rs 585,000 crore of
government bonds. RBI has been funding the government by absorbing 10% to 30% of gross
borrowing45 every year over the last six years. RBI sees bond purchases as an addition of
liquidity into the system, and has been fighting inflation over the last few years, raising repo
rates from as low as 4.75% to levels of 7.75%. Rs. 5850 billion have been infused into the
system. It is due to this, researchers believe, that India did not suffer as heavily as many other
countries during the 2008 meltdown.

The second stream of economic thought believes that India has not adopted quantitative
easing mainly because it has not paid heed to or implemented its entire procedure. Merely
buying OMO does not lead to quantitative easing; it is the prevalence of a liquidity trap,
economic meltdown/slowdown, inflation/deflation, and lack of disposable income that all
come together to create quantitative easing. Furthermore, quantitative easing occurs
regardless of interest rates, which is not the case for the RBI, who buys back only a certain
pre decided rate.

The following are the reasons why it is believed that India does not, and cannot follow
quantitative easing:46

 In India, inflation is not purely a monetary phenomenon but is majorly linked to supply
constraints. This is solely in addition to the fact that policy rates in India are not like the

45
Parthasarathy, Arjun. 2015. “Think budget was tight? RBI’s QE was worth Rs 585,000 cr in the last six
years.” Firstpost. Available at https://www.firstpost.com/business/economy/rbis-qe-rs-585000-cr-over-the-last-
six-years-1353225.html (last visited August 19, 2018)
46
Montes, Manuel F. 2013. “As in previous episodes of global financial instability–1982, 1994, 1997-
developing countries face the prospect as Paragraph 263 of the Rio+ 20 outcome.”

26
 transmission rates in America. So, changes in policy rates come with a major lag and may
not in most of the cases affect the base rates of banks. As base rates by the Indian banks
are calculated on average principle rather than marginal principle, it is close to impossible
for quantitative easing to have an effect on the economy because only interest rates can't
affect the investor’s sentiments.

 Quantitative easing doesn't always help an economy, more so in case of India. It is a mere
expansionary monetary policy and it decreases interest rates and increases asset prices. In
the short term, expansionary monetary policy increases the employment but it increases
inflation rate too. But for India controlling inflation is more important in current situation.
This demerit was also previously highlighted, and echoes in case of India as well.

 Another problem that India faces is that we have a depreciating currency. A weak rupee
increases the cost of imported oil, which in turn increases the cost of transported
agricultural produce and triggers food price inflation. More money in the system will only
aggravate the situation by causing more inflation. More inflation could cause even more
rupee depreciation culminating in a vicious cycle. Thus, they believe that quantitative
easing isn’t and cannot be made suitable for India.

4.2 FINANCIAL RESOLUTION AND DISPUTE INSURANCE BILL, 2016

Since India does not have a particular quantitative easing mechanism in place currently, it is
important to understand how India expects to deal with times of financial distress in general.
For this, the Financial Resolution and Dispute Insurance Bill (FRDI Bill, 2017) was created.

The underlying principle behind the introduction of the FRDI Bill is to build up a resolution
regime for financial institutions in distress while protecting taxpayer interest. The FRDI Bill
aims to create an incorporated framework which involves the early detection of risks through
continuous monitoring.47 This bill was launched in the backdrop of the 2007-08 recession so
as to avoid failure of financial institutions.

While this bill is not directly related to the phenomenon of quantitative easing in itself, it is
indirectly connected because it helps to analyse how the Indian economy specifically
47
2018. “Financial Resolution and Dispute Insurance Bill, 2017: Key Highlights.” PWC. Available at
https://www.pwc.in/assets/pdfs/publications/2018/financial-resolution-and-deposit-insurance-bill-2017-key-
highlights.pdf (last visited August 14, 2018)

27
functions in times of economic slowdown. Quantitative easing is also essentially linked to
alleviation of an economic slowdown.

The following are the major mechanisms set into motion by this bill: 48

 A ‘Resolution Commission’ is to be established by the Central Government, consisting

mainly of financial regulators. This Commission will act as a regulator and liquidator of
companies during financial distress. Apart from this, it has been given the power to enter
into contracts and provide deposit insurance to banking institutions. Deposit insurance,
consisting of bank deposits that are payable in India, is a means to ensure that a financial
institution does not lead to losses for its customers by insuring Rs. 1,00,000 for them in
case of amalgamation/merger/reconstruction. 49

 Another key function of the corporation along with appropriate regulators is to assess and
classify the insured service providers based on the risk to viability. Five categories based
on the probability of failure of an insured service provider have been created by the RBI
and Finance Ministry:

Category Probability of Failure

1. Low Substantially below acceptable levels of probability of failure

2. Moderate Marginally below or equal to acceptable levels of probability of failure

3. Material Marginally above acceptable levels of probability of failure

4. Imminent Substantially above acceptable levels of probability of failure

Substantially above acceptable levels of probability of failure and on

5. Critical
the verge of failing to meet its obligations to its depositors

Source: 2018. “Financial Resolution and Dispute Insurance Bill, 2017: Key Highlights.” PWC. Available at
https://www.pwc.in/assets/pdfs/publications/2018/financial-resolution-and-deposit-insurance-bill-2017-key-
highlights.pdf (last visited August 14, 2018)

48
2018. “Financial Resolution and Dispute Insurance Bill, 2017: Key Highlights.” PWC. Available at
https://www.pwc.in/assets/pdfs/publications/2018/financial-resolution-and-deposit-insurance-bill-2017-key-
highlights.pdf (last visited August 14, 2018)
49
Reserve Bank of India. “Frequently asked questions: Deposit Insurance.” Available at
https://rbi.org.in/scripts/FAQView.aspx?Id=64 (last visited August 21, 2018)

28
 There is a systematic ‘Resolution Plan’ whereby service providers falling under the
imminent or critical risk category are obliged to provide resolution and restoration plans
to the corporation, which will include all the information regarding assets and liabilities
of their institution. They must incorporate a resolution between 1-2 years, failing which
their case shall be reported to the National Company Law Tribunal (NCLT) and they shall
face punishments.

5. SUITABILITY OF QUANTITATIVE EASING TO THE INDIAN MARKET: A

CONCLUSION

The overall hypothesis anticipated by the researcher has been proved to be true. Quantitative
easing is truly an unconventional method best suited for economies wishing to increase/begin
money supply in situations of liquidity trap. This is because the injection of money by central
bankers into the economy is not just regulated, but also withdrawn after some time, leading to
no overall apparent loss/misfortune upon the economy.

However, the anticipation that quantitative easing is always successful and has always
produced desirable effects is a flawed premise. Quantitative easing is, as is generally
accepted now, the most important and effective short term method but does not cater to long
term benefits of an economy. In the short run, an excessive amount of money supply is
witnessed in the economy, which helps to boost the defunct institutions and banks. However,
in the long run, this can cause an asset bubble due to price rise, which can further the inflation
that was intended to be alleviated in the first place.

As regards India, the researcher’s hypothesis has come true whereby quantitative easing is
not necessarily the best method of increasing money supply for India. The disadvantages of
this method for Indian economy outweigh the advantages. This is mainly because the Indian
currency is weak, and therefore increasing money supply without results will effectively
devalue our already low-valued currency and cause problems for the economy. Another
important fact is that since India’s goal is to specifically reduce inflation through
conventional method, the unconventional method of quantitative easing cannot cater to its
requirements. The stakes are too high for our developing economy, and hence sticking to the
conventional method may be a better option.

29
 5.1 POLICY STATEMENT

Whilst attempting to understand the nature of both quantitative easing and the specific nature
of the Indian economy, the researcher believes that India should not currently adopt a
policy of quantitative easing. The reasons for this are multifarious and intertwined, as
follows:

Firstly, quantitative easing has as many demerits as it has merits. If successful, it can create
the much required money supply in the economy. However, the problem is that if one round
of quantitative easing is unsuccessful, the central bank, having no other option, is forced to
resort to more such pumping rounds. This is problematic to two extents: firstly, the currency
value will keep dropping and secondly, there may not be mechanisms in place to actually
absorb so much currency inflow and successfully neutralize money supply in the economy.
India, being a fast growing economy, cannot actually afford to take such risks.

Secondly, India already has a weak currency value. As quantitative easing, in the short term,
weakens currency value, it is difficult for a country with an already weak money value to
reduce the value of the Indian rupee. While it can be argued that this will further boost our
economy by inviting further foreign direct investment, unless we do not have a proper
mechanism to retain the original money value before the quantitative easing began.

6. BIBLIOGRAPHY

Books Referred

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 Hager, Sandy Brian. "Bonding Domestic and Foreign Owners." Public Debt, Inequality,
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 Joyce, Michael, David Miles, Andrew Scott, and Dimitri Vayanos. "Quantitative easing
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Survey." Oxford Review of Economic Policy 28, no. 4 (2012): 750-64

31
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7. ANNEXURE

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35
Source: Blinder, Alan S. "Quantitative easing: entrance and exit strategies." Federal Reserve Bank of St. Louis
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Source: Parthasarathy, Arjun. 2015. “Think budget was tight? RBI’s QE was worth Rs 585,000 cr in the last six
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Source: Allen, Katie. “Quantitative easing around the world: Lessons from Japan, UK, US.” The
Guardian. Jan 22, 2015. Available at https://www.theguardian.com/business/2015/jan/22/quantitative-
easing-around-the-world-lessons-from-japan-uk-and-us (last visited August 18, 2018) 36