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Quantitative Easing

Fed Tapering[GS2] Effect of policies and politics of developed a

developing countries on Indias interests, Indian

diaspora.

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Dollar

SupplyFDI-FII

Exchange

Rate

Import

Export

Sub Prime

Crisis

Quant.

Easing

Fed

Tapering

Impact on India

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Prime Borrower

Sub Prime Borrower

Sub- Prime Crisis

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PRIME BORROWERS

Securitization=>

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SUBPRIME

BORROWERS

SUBPRIM

BORROW

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SUBPRIME

BORROWERS

SUBPRIM

BORROW

TOXIC Assets TO

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Impact on India

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Dollar

SupplyFDI-FII

Exchange

Rate

Import

Export

Sub Prime

CrisisLow Out

Rupee

strong (39)down

Quant.

Easing

Fed

Tapering

Impact on India

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Repo. Rate / Fed. Funding Rat

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Toxic Assets

Sub-Prime Borrowers

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Quantitative Easing (Toxic Assets + T-Bo

(Electronic)

Dollar supplyincreased

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Dollar

SupplyFDI-FII

Exchange

Rate

Import

Export

Sub Prime

CrisisLow Out

Rupee

strong (39)Down

Quant.

EasingHIGH

Increase

HOT

money

Strong

09=50

10=44

Down

subprime

Greece/E

Fed

Tapering

Impact on India

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December 2012

When to stop QE?

Inflation >2.5%

Unemployment

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F d T i

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mechanical term= Continuous reduction of width.

Fed Tapering

85 7565 55

Dec 13 Jan 14 Feb 14 March 14

BILLION USD

I t I di

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Dollar

SupplyFDI-FII

Exchange

RateExport

Sub Prime

CrisisLow Out

Rupee

strong (39)Down

Quant.

EasingHIGH

Increase

HOT

money

Strong

09=50

10=44

Down

subprime

Greece/E

Fed

TaperingMed. Decline

Rupee

weak (60)

(Good for

Export)

May

increase

Impact on India

FT I t I di t

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1. FII run away =>Sharemarket crash (fof capital)

2. Dollar supply decrease=> rupee wea

3. Good for export, bad for import & E

4. No boost in export from USA, EU

5. BoP crisis (high CAD, low capital)

FT Impact on India: worst case scen

Wh B P i i i 1991 92?

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Why BoP crisis in 1991-92?

1991 (Apr-Sep) Million $$

Current -6000Capital +4000

Overall Balance -2000

IMF loan +2300 GOLD pledg65 tonnes

St t k t t t i t F

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BRICS Bank

- Decision to setup $100 bn

- Help member nation in crisis- Limitation: will operate from

2015

China

Russia

India

Brazil

SouthAfrica

total Bn

Steps taken to protect against F

Steps taken to protect against FT (20

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NRI FCNR: interest rate hiked +swap. (+35 bn$) =Capital inflowincrease

Steps taken to protect against FT (20

Steps taken to protect against FT (20

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Dollar swap for Oil Marketing Co.

buy $$ from RBI instead of

Market repay dollars at later date (Feb-

April 2014]

= Volatility decline

managed float exchange

regime

Steps taken to protect against FT (20

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Steps taken to protect against FT (20

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Inflation => Real interest ratenegative => gold / real-estate.

If RBI starts Inflation targeting=>more investment in banks andsecurities by locals.

FDI, FII, ECB= less dependence.

Steps taken to protect against FT (20

Mock Question

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The fears about the negative impact of Fed tapering on Indeconomy, are unfounded. Do you agree? Justify your stand200 words | 7 minutes)

Mock Question

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Mock Question

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Why fears unfounded?

1. Fed tapering = US economy back on track = boost i

by US firms =good news for Indian IT firms.2. BRICS bank.

3. RBIs side:FCNR reform, dollar swap for OMC, currswap with Japan

4.Governments side

: FDI reform, fast tracking projeAs a result (1) forex reserves are good enough to withpressure (2) economy resilient and attractive for capitinflows.

Mock Question