The way it should be

"It should not escape notice that gold and silver after circulating in every other quarter of the globe, come at length to be absorbed in Hinduston"

                         ~Francois  Bernier

US Fed Stimulus: What is that all about!

Posted by VASUDEVA REDDY on Thursday, July 18, 2013 Under: economic articles
As you know, our government always wins a blame game, this time, they had put blame on US Fed bank quantitative easing programme. Let me brief about that stimulus programme. After sub prime crisis, Americans stopped spending their money, as they left with no money with them. Unlike, European and Asian economies, US economy had built on their citizens spending. As they stopped spending, growth started to see zeros and negatives. To boost up the spending, US fed bank had decreased the interest rates to the lowest level possible, with the hope that increased liquidity will make people to spend more. Unfortunately, things didn't change much and the growth rate was not as they anticipated. Now, they cant decrease the interest rates further as they were at lowest possible levels. To push the liquidity further, apex bank had opted for Quantitative Easing (QE) or familiarly US stimulus programme.
So, what this is all about. Well, fed bank started purchasing bonds issued by govt, public and private sector banks and from few insurance companies. The logic behind that is, as they started purchasing bonds (demand will rise with the same supply), the bond prices would go up.  Buying bonds wouldn't be a great choice as their prices are higher inturn returns are lower, i assume you know how a bond operates ( other wise, inbox me). This leaves people and investors with no other choice than investing in companies with the easily available money which would eventually boost up the growth.
I guess, you understood the logic behind the quantitative easing, so, the question is, how that would affect indian rupee, for that matter any currency around the world. As the growth became slower, the equity firms in US, explored other safe heavens for the investment, obviously India and China would be in top five of their choice, given the size of economy and the growth rate it was recording. Our capital markets flooded with the dollars from FIIs, our market breached the 20k level and recorded its highest peak. Other side of the picture, US economy stopped lumping and started to learn how to walk properly, in the meantime. Conversely, Indian economy started slowing down from its 9% growth rate to 5% with ever widening current account deficit. India started loosing the its shine as the safe heaven for investments. With the widening current account deficit, outflow of dollars, slowdown of economy, euro crisis, and with many other factors rupee started slipping, faster than one could imagine and to the level one never expected. But how the dollar had started flowing out, well, imagine you have plenty of money with you and wanted to invest. You have two choices, one economy which is strong and stable which would grow at around 3% in future and another with the rattling current account deficit and flattening growth. The choice would be obvious, the first option was USA and the second was India

In : economic articles 


Tags: united states us fed federal bank india rupee fall depreciation rbi quantitative easing 

About Me


blog comments powered by Disqus
Make a Free Website with Yola.