The US is expecting of tapering of massive assets, as it is the first pillar of monetary policy. The amount of purchasing is expected to bring down to $105bn from $120Bn. It will be done by trimming $5Bn in mortgage-backed securities and $10Bn of treasures from $40bn and $80Bn respectively. What is tapering? Tapering refers to a step of withdrawing monetary stimulus which reflects a supply of money in the market referred by US FED to prevent the nation from a crisis. This unconventional monetary policy of buying assets is known as quantitative easing. When was implemented and what happened? Taper tantrum implied in 2013 by FED Reserve in a disrupted market where cash outflow was high and pushing inflation. The currency depreciated about 27% from Rs 55 to Rs 70 from 2013 to 2018. There was a positive flow of foreign investors in the equity market. Bond yield decreased to 7.37% from 8.05% in 2013 to 2018.So, to restrain it quantitative easing was adopted in 2018 where interest rates were virtually decreased to zero. Recently, the US Federal Reserve is planning to taper the purchase of assets and hike interest rates to control inflation, due to inflation being high in 4 decades to 6.8% in November 2021. Looking to plans tapering on assets will be double from Jan 2022 of $30bn.Tapering is used to control the inflation rate and bring approximately 2% stability to the economy.Amid of pandemic in July 2020, the US has seen a strong economy with high pressure and the money supply increased. So, how will this tapering work? Tapering is a purchase of Bonds and mortgage securities when government limits the bonds in the market prices go up and bond yield comes down which helps the government to control inflation in the market.Recent tapering may affect consumers by FED Reserve will reduce in purchase and interest rate can be seen increase marginally, hence the loan borrowing on purchasing of cars, houses, etc. will hike. What will be the Impact on India? India performed well in COVID – 19 against financial crisis in comparison to other developing nations. The effect of tapering is anticipated to be very limited if confidence among investors sustains. India has also accumulated sufficient foreign reserves of $642.019 billion as of October end. Thank you.
Really well written
ReplyDeleteWell conveyed and stats are interesting
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