Quantitative Easing and its impact

Q. Quantitative Easing and its impact: Dear Mentor, Could you please tell me why the US quantitative easing is bad for exporters and call centres in India ?

The use of quantitative easing is a lasxt resort when interest rates are already set near zero percent. It is why quantitative easing is an unorthodox monetary policy since central banks will only perform quantitative easing when all other options are not helping the economy.

Concerns for the CIS, BRIC, and other emerging economies is related to how the globalized nature of the international economy and actions by the United States or the European Union impact the emerging economies

The effects of such QE would be :

1. In general, financial firms that are now free to lend will rush their investments into the emerging economies. This is because there is a higher rate of return on investments in emerging countries compared to highly developed countries like the United States.

2. An increase of local inflation. As more foreign currency enters into a country, like a CIS or BRIC country, the local economy reacts with inflation since more money, foreign or domestic, is available in the local market.

3. Local currencies could be devalued. With the quantitative easing cheaper, other countries react by devaluing their currencies so their exchange rates are lower. This can cause a global currency war, resulting in large scale, impaired economic growth since citizens will be unable to purchase many goods or services.

4. Moreover,the money that will come in will be “hot money” and such investments are very volatile and short term. Hence their later withdrawal from the economy will lead to spiralling down of the local currency.

5. Due to the unfavourable and fluctuating market, investors will be skeptical to invest in the stock markets

6. The EU is India’s largest trading partner and this will hit the indian exports to the EU badly

If the nations of the European Union are not careful with the amount of quantitative easing they perform, it will have dire consequences around the world. The European Union and others need to solve their economic problems, but if they are not careful, their solutions will seriously harm other nations and plunge the world deeper into economic turmoil.