Quantitative easing

Markets And Economy

Beginning of Fed Taper – Impact on India and other Emerging Markets

  Two major events scheduled on the 18th of December, were seen as deciding factors for the stock market movement in India by the end of 2013. First was the announcement of monetary policy by the Reserve Bank of India (RBI) governor. Raghuram Rajan beat the market expectations of a hike in interest rates and surprised the markets pleasantly with no changes to the current monetary policy. RBI kept the repo rate unchanged at 7.75 % , the reverse repo at 6.75%, the cash reserve ratio at 4% and the marginal standing facility and the bank rate at 8.75%. Markets reacted favorably to the announcement. Later on the same day, US Federal Reserve Chairman Ben Bernanke initiated pullback from Quantitative Easing (QE) before the end of his term in 2014, with Janet Yellen taking over as the Chairperson of Federal Reserve. As the size of the taper, $10 bn was in line with what the market had expected back in September, 2013,  the announcement saw the US markets shooting up.  

Markets And Economy

Monetary Policy and Inflation

  The announcement of Monetary policy is awaited by businesses and investors alike, who are eager to know the impact of the change in policy on their savings or on their business. Here we look at how monetary policy impacts the economy.The objective of Monetary policy is to control the supply of money to boost economic growth while keeping inflation within acceptable limit. Some tools of monetary policy that are used by the central banks are: Lowering of short-term Interest Rates: This is the first tool used by the central banks around the world. When interest rates are lowered, it becomes cheaper to borrow money and less lucrative to save.  This brings about a decline in savings, individuals and corporations are encouraged to spend; more money is borrowed, and more money is spent, thus increasing the overall economic activity. Open Market Operations: Under OMO, the central bank buys bonds (from banks or general public) in the open market.  By exchanging bonds for cash, the central bank increases money supply in the economy. Due to increase in the supply of money relative to demand, money can be borrowed at lower interest rates. This means that the short term interest rate for borrowing decreases. Conversely,…

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