QUANTITATIVE EASING

QUANTITATIVE EASING

Subject: Economics

Context: RBI’s calibrated measures will likely be able to address the issue of an increase in demand for funds from both the govt and the private sector in FY22.

Concept:

• Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.
• Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also expands the central bank’s balance sheet.
• When short-term interest rates are either at or approaching zero, the normal open market operations of a central bank, which target interest rates, are no longer effective.
• Instead, a central bank can target specified amounts of assets to purchase.
• Quantitative easing increases the money supply by purchasing assets with newly-created bank reserves in order to provide banks with more liquidity.