Taper timetable: 

Taper timetable

Context:

The conclusion of quantitative easing in the U.S. could affect investment flows into India

Introduction:

  • The U.S. Federal Reserve started is unprecedented programme of liquidity infusion through the purchase of asset-backed and Treasury securities in the wake of the global financial crisis.
  • The Federal Reserve will throw its crisis-era stimulus programme into reverse from next month and stick with plans for further rate rises in a mark of confidence that stagnant inflation is set to bounce back.

Key points:

  • The asset wind-down will begin with monthly reductions of a modest $10 billion in the three months through December.
  • That amount will gradually increase in quarterly increments of $10 billion so as to reach, in October 2018, a monthly cap of $50 billion
  • The FOMC has, in fact, marginally raised its median projection for U.S. real GDP growth in 2017 to 2.4%, from the 2.2% estimated in June
  • monetary authorities in the U.S. are focussed on reflating the economy by supporting “further strengthening” in the labour market through an accommodative stance, the central bank has to remain vigilant in warding off any let-up in expansionary momentum

What is Quantitative Easing?

  • Quantitative easing is a massive expansion of the open market operations of a central bank.
  • It is used to stimulate the economy by making it easier for business to borrow money.
  • The bank buys securities from its member banks to add liquidity to capital markets.
  • This has the same effect as increasing the money supply. In return, it the central bank issues credit to the bank’s reserves to buy the securities.

Implications on India:

  • It could affect investment inflows in India
  • It will have pressure on the current account deficit.
  • For Indian policymakers, there are both positive and negative cues.
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