Analyse how far the U.S Federal reserve’s recent policy change could affect Indian economy?
Refer - The Hindu
IAS Parliament 8 years
KEY POINTS
· The U.S. Federal Reserve recently announced that, it would begin to gradually roll back its nine-year programme of quantitative easing (QE).
· The U.S. central bank resorted to QE in the immediate aftermath of the 2007-08 financial crisis in order to boost a falling economy.
Quantitative Easing
· QE is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.
· QE increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.
· QE is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
Impact in India
Impact on economy
· Slowdown of dollar inflows in equity and debt
· Dollar outflowscould weaken the rupee, and hold the RBI back from cutting interest rates as that could lead to further outflows.
· With crude prices on the rise, a weak rupee will inflate the import bill and put pressure on the government’s finances.
Impact on market
· A rate hike will improve the yields on US government bonds. In other words, the bonds will offer a better rate of return than before.
· This could prompt global money managers to shift a part of their money into US government bonds.
· More often than not, fund managers sell a part of their holdings in emerging market equities and deploy that money in US bonds.
Impact on companies
· Imported raw material such as copper, aluminum and machinery can turn expensive, potentially squeezing margins of companies dependent on them to make products.
· This may lead to hike in prices of goods such as cars and televisions.
· The rupee’s slide can also hurt companies with foreign currency loans as repaying in dollars will get costlier.
Impact on start-ups
· Investors shift their part of capital and even focus away from markets such as India towards the US.
· This may likely to lead to more consolidation, shutdowns, and lowering of valuations of Indian start-ups in the months to come.
Impact on investments by people
· A stronger dollar could negatively impact gold prices.
