Impact of QE1 and QE2 on Indian Economy

During the 1^st version of quantitative easing, the US Federal reserve bought around $1.45 trillion of mortgage-backed securities and other agency debt. This entire activity took place during the 14 month long stint of QE1. Also securities worth around $600 billion were bought during the 8 month period of QE2.

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Impact of QE1 on Indian Economy

If we talk about the Indian market, the QE1 came at an important time. Nifty had started bottoming out around 2500, post which it began its climb. During the crisis of 2008, over Rs. 54,000 crores were withdrawn from the Indian economy by the FII and as a result of which nifty, the NSE index tumbled down. Soon after during the period of QE1, the Indian market saw a whooping investment flow to the tune of over Rs. 1,00,000 crores. Such change in sentiment was observed when the announcement of QE1 came internationally.

Impact of QE2 on Indian Economy

The period from December 2008 to March 2010 saw the investment and led nifty to climb high. Nifty as a result of such huge investment doubled and gave the investors huge return. Soon after during the QE2 period, the economy saw inflows of around Rs 40,000 crores. The positive response seen in the market during the QE1 period was however missing this time and Nifty tumbled close to 6% right before QE2 announcement. The mute response of QE2 by the economy was attributed to the negative effect of higher commodity prices. Prices of global commodities like Oil, Gold, etc. kept hurting the investment sentiments. Also the poor reforms by the Indian government added fuel to the fire and the economy saw a slow performance.

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Impact of QE1 & QE2 on Oil Price

If we talk about the commodity price difference we see that the basket of crude which was priced at around 40$/bbl around the time QE1 doubled during the period of QE2, to reach the levels of 80 $/bbl by April 2010. The rally in the oil price didn’t end here and it climbed higher to reach the new levels of around $110/bbl by June 2011. Thus we can very well conclude that both QE1 and QE2 had a direct impact on the price of Oil.

India being a major importer of Oil faced a tough condition due to high inflation, thanks to the high price of Oil. India currently imports over 70% of its Oil requirement, which severely affects its fiscal deficit and balance of payment. Adding further, the huge population and super high oil subsidy only add to the hefty oil bills affecting the fiscal deficit negatively and leads to the increasing the current account deficit (CAD). This fiscal deficit resulted in depreciation of rupee in the international market.

Impact of QE1 & QE2 on Gold Price

Moving on to the second major commodity used globally Gold, we see that the price saw a similar trend. The price of gold kept rocketing and gained consistently ever since quantitative easing as a strategy was implemented by the central banks. Gold is one of the investment instruments used by the central banks to keep a check on its monetary policy. The price of gold went from $800/ounce to around $1200/ounce and further to $1600/ounce by the time QE1 and QE2 ended respectively.

Again India, being an importer of Gold due to its heavy demand, it adds to the major part of the current account deficit. Rising gold price worsens the current account. Strong demand of Gold throughout the year irrespective of prices has worsened the current account deficit for the economy.

Conclusion

At last, to conclude it can be said that QE1 and QE2 were positive for the markets but on the macro-economic front, it was only a matter of deep concern as it resulted in rising Inflation, CAD, Fiscal Deficit and also led to poor GDP growth and weakening of rupee.