Quantitative easing is a monetary policy used by central banks to stimulate their economy by increasing the money supply. The central bank creates money to buy government bonds from banks in exchange for cash, increasing bank reserves. This is intended to improve credit flow. However, excessive money creation can cause currency devaluation and inflation. While quantitative easing aims to boost the domestic economy, it has international impacts like currency fluctuations, trade imbalances, rising commodity prices, and challenges for emerging markets and debtors.

1. Is Quantitative Easing BeneficialIs Quantitative Easing Beneficial
To Global Economy ?To Global Economy ?
PRESENTED BY:
VEENA MOHANDAS
(Test Engineer -- BNP PARIBAS)

2. What is Quantitative Easing ?What is Quantitative Easing ?
Unconventional monetary policy used by some central
banks to stimulate their economy. The central bank
creates money which it uses to buy government bonds
and other financial assets, in order to increase the
money supply and the excess reserves of the banking
system

3. How does QE work?How does QE work?
The term quantitative easing (QE) describes a form of monetary policy used by
central banks to increase the supply of money in an economy when the central
bank interest either at, or close to, zero.
Fed supplies money to
banks
Banks supplies specified
bond instruments
In QE US Fed would buy the designated bonds from the US banks in exchange
for cash US Dollars

4. Fed supplies money to
banks
Banks supplies designated
bond instruments
Banks lend the funds to
consumers and business
QE is intended to improve the flow of credit in the
economy by flushing the banking system with funds

5. Effect on US DollarEffect on US Dollar
Excessive $ in the
economy
Flight of $ in the
emerging market
Devaluation of $
Purchase of Treasury
Bonds
Leads to Inflation
 For better returns
 Interest rate hike in India to check
inflation, it becomes favourite spot
for hot money
$ is devaluated against Other
Currencies
With a higher interest rate leading to
overall flat liquidity in the market

6. Impact on Trade DeficitImpact on Trade Deficit

7. 2007-2010 (US Crisis)2007-2010 (US Crisis)
The financial position of US was set to weaken
Macro economic indicators were still weak
Dollar index reached the lowest point in Q4 2010
Diversification out of the Dollar
Threat from the Chinese Economy

8. (Cont....)(Cont....)
Rush to dump the US Dollar and to accumulate
gold and other more stable currencies
China had started BILATERAL TRADE in
Yuan with a number of Asian and African
Countries
OPEC shifted to more stable currencies

9. Effect On CommoditiesEffect On Commodities
 Commodities are $ denominated thus along with the $ the commodity prices
are likely to become cheaper in currencies that revalue them
 This is likely to make countries like CHINA hoard metal like copper to boost
future growth thus increasing its demand. This would lead to SPECULATIVE
BUYING OF COMMODITIES
 Furthermore, with LOW INTEREST RATES and high inflation people like to
hedge with commodities. This would lead to HIGHER COMMODITIES
PRICES
 Low interest rates make bank deposits useless specially if the inflation is
higher than the rate

10. Effect on GoldEffect on Gold
Gold is a HEDGE
AGAINST INFLATION
and uncertainty
With Low Interest Rates;
slow and uncertain
recovery of the global
economy of US, the GOLD
PRICES ARE LIKELY TO
HOLD STRONG.
Uncertainty of USD has
prompted countries to
SHIFT RESERVES TO
GOLD
All major economies are
shifting to Gold

11. (Cont...)(Cont...)
All major economies are shifting to Gold
Countries are diversifying the forex reserves
US holds highest volume of Gold in the world
China gold holdings also surged to a great level
and now is the fifth largest Gold holder in the
world

12. Effect on Oil prices and its impact onEffect on Oil prices and its impact on
both emerging and developed marketsboth emerging and developed markets
Uncertainty of USD will raise the Oil Prices
Rise in crude prices has an INFLATIONARY
EFFECT
Therefore, it will slow down growth in the emerging
markets

13. Impact on emerging marketImpact on emerging market
currencies and on its economycurrencies and on its economy
 Flight of USD to emerging markets has led to the appreciation of
the Local currency. This has ramifications on the exports of the
country and overall BOP
 Countries are artificially devaluing their currency to pep up exports.
US has lately asked to China to revalue to its currency as they were
in a disadvantageous position and threatened to retaliate

14. Understanding International DebtUnderstanding International Debt
Due to quantitative easing, USD and other major
currencies are devalued
As a result repayment of debt becomes expensive

15. Effect On BondsEffect On Bonds
 Excessive Demand
 Demand of Treasury
Bills likely to go up
 Go long as prices are
expected to increase

16. QE Impact onQE Impact on
European UnionEuropean Union
QE will induce excess
USD into the US
economy
This will lead to the
Devaluation of USD
against other currencies
This is not favourable
for exports by EU to
US, thus will have a
negative effect on EU

17. Impact On Chinese EconomyImpact On Chinese Economy
 China artificially
maintains a devalued
Yuan
 There is a limit to the
amount of USD which
a central bank can
hoard
 Excessive Yuan in the
market will lead to
inflation
 Thus, it is inevitable
that China revalues

18. Reserves Of ChinaReserves Of China
 Due to artificial revaluation large assets have been built up in China
 It is estimated that about 70% of China’s foreign exchange reserves
are invested in dollar assets
 A stronger Yuan would attract “Cross-Border Arbitrage “ funds
because of the country’s relatively higher interest rates

19. (Cont..)(Cont..)
Proceeds from exports
would also rise as global
recovery generated demand
for Chinese goods
With FDI expected to
increase steadily, China
will be facing greater
pressures from the rising
amount of foreign
exchange inflows.
Any sudden revaluation
will prompt rapid sale and
may cause a Bubble effect

20. (Cont..)(Cont..)
Gold purchases could help China reduce the risk of
holding large volumes of US dollar assets as a
major part of its foreign exchange reserves
Purchases could push up gold prices sharply. Also,
the average long-term returns on investment in
gold are low.
If China purchases gold on the international
market price will surge which would in turn affect
Domestic Individual Consumers