Relevance of quantitative easing model to heal the sick Indian economy

Abstract

The present situation of Indian economy is worse. The GDP growth rate is 5% which is very low compared to last five years trend. After a record fell down of short-term interest rates of commercial banks (below one percent), the Reserve bank of India has turned to quantitative easing (QE) to hold up economic growth. It is used by the government to amplify the supply of money in the economy. It leads to an increase in lending by commercial banks and spending by customers subsequently. On the other hand, these policies will boomerang greatly on economy and leads to extraordinarily high levels of inflation. If commercial banks fail to afford excess reserves, it may direct to unhinge in the money market. Simply it jeopardizes the entire economic system. To come out from this, Reserve Bank of India injects a fixed quantity of money into the economy by massive and unprecedented purchasing of financial assets from commercial banks and private entities. This leads to an increase in banks reserves. Quantitative easing is not a new word to the economic world; it is most popular from the times of great recession in US economy. There has been an explode of research on QE and its effects. Past studies tremendously agree that QE helps in ease financial conditions and there is no reason to doubt that it supports economic growth. It is not only very powerful in times of financial crisis, but also has a momentous effect in normal times. By and large, this research paper focuses on finding the reasons behind the slowdown of growth rate of Indian economy and provides the likely solutions to come out from the crisis.