What: Quantitative easing (QE) is a massive expansion of the open market operations of a central bank. It is a form of unconventional monetary policy in which a central bank purchases longer-term securities (as well as other types of assets, such as mortgage-backed securities – MBS)  from the open market.

Objective:

• To increase the money supply quickly and encourage lending and investment.
• It is used to stimulate the economy by making it easier for businesses to borrow money.

Benefits:

• 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.
• By increasing the money supply, QE keeps the value of the country’s currency low. This makes the country’s stocks more attractive to foreign investors.
• It also makes exports cheaper.

Background:

• Japan was the first to use QE, from 2001 to 2006. It restarted in 2012, with the election of Shinzo Abe as Prime Minister. He promised reforms for Japan’s economy with his three-arrow program, “Abenomics.”
• The U.S. Federal Reserve undertook the most successful QE effort. It added almost $2 trillion to the money supply. That’s the largest expansion from any economic stimulus program in history.
• The European Central Bank adopted QE in January 2015, after seven years of austerity measures.
• In response to the economic shutdown caused by the COVID-19 pandemic, on March 15, 2020, the U.S. Federal Reserve announced a quantitative easing plan of over $700 billion.

Is quantitative easing printing money?

Critics have argued that quantitative easing is effectively a form of money printing. It can cause hyperinflation.

However, proponents of quantitative easing will point out that, because it uses banks as intermediaries rather than placing cash directly in the hands of individuals and businesses, quantitative easing carries less risk of producing runaway inflation.

Government Securities Acquisition Programme (GSAP)

• Reserve Bank of India (RBI) has embarked on quantitative easing (QE). It has given it a new name: Government Securities Acquisition Programme (GSAP)

Under this programme RBI, promises to buy Government security during the second quarter of FY22 and conduct secondary market purchase operations of Rs 1.20 lakh crore. Even though this is not outright monetization of the deficit, it amounts to that. The GSAP is also intended to reduce the gap in yields that have arisen between short- and long-tenor securities, also known as the term premium.