Finally, this crisis hit world has decided to use the most potent weapon in its arsenal. Its nothing but quantitative easing. Most of us might not be aware of the reason behind the coining of this fanciful term. Basically, it stands for monetization of debt i.e printing of money by the central bank of a country to finance huge fiscal deficit and to increase liquidity in the market when other instruments of financial policy like monetary policy have been exhausted.
Recently, the US Fed has announced that it would buy the US treasury bonds amounting to close to $1.2trillion which would be financed by printing money. Similar indications have been made by the bank of England. Till now, india has resisted the temptation to use this instrument. But, the finance ministry seems to be mulling this option for a while and our government may go for restarting the printing presses which had been lying idle for quite some time .
Quantitative easing results in the devaluation of a country's currency against a basket of foreign currencies besides resulting in inflation in the long run. It was a normal practice in india prior to 1991. However with the implementation of economic reforms ,some restrictions were placed in 1997. Finally, when the UPA came to power in 2004,it passed the FRBM act by which the government could not directly approach the RBI for funds beyond 1st jan 2006. It was decided that this policy measure would be used only in situations akin to economic emergency.
However, the present situation calls for extraordinary measures to tackle this extraordinary situation and we should not be myopic to restrict ourselves to the textbookish approach in this situation where growth rates have fallen significantly, coupled with huge fiscal deficits and the accompanying spectre of the vicious cycle of deflation. Finally ,we conclude that no policy instument is untouchable and decisions should be made depending on the unbiased analysis of a situation rather than some fixed traditional approach
