A Study of Interplay between Quantitative Ease by US and other Trading Partners and Rupee Volatility

Abstract

In the aftermath of the global financial crisis of 2008-09, leading Central Banks (like the Federal Reserve, Bank of England, European Central Bank and the Bank of Japan) have introduced a multiplicity of untraditional monetary policy measures, so as to stimulate the economies and curb the severity of inflation at the international level. Quantitative Easing may be defined as a policy measure that results in an expansion of the Central Bank’s balance sheet, with an augmentation in the level of the bank’s money in the economy (Bernanke and Reinhart, 2004).

Analysts claim that the strengthening of the dollar, which is being supported by the US Fed Reserve's constant rate hikes to counter rapidly rising inflation, is the principal reason behind the depreciation of the Indian rupee. Moreover, other aspects including the withdrawal of foreign institutional investors also affected the rupee strength and macroeconomic dynamics. According to the IMF, the strength of the dollar causing serious problems such as tightening financial conditions and raising the price of imported goods and services in many emerging economies such as India. Furthermore, an instant hike in oil prices driven by the war between Russia and Ukraine also weakened the rupee and consequently India's current account deficit reaching an absolute record high in the third quarter of the year 2022.

No doubt, in comparison to US dollars, the value of the Indian Rupee has deteriorated in international markets. But at the same time, there are other currencies where the rupee still holds the top spot when evaluated against other currencies throughout the world. Notwithstanding all the challenges, our union finance minister Nirmala Sitharaman reportedly announced that the Indian rupee is considerably better positioned than other international currencies against the greenback. Moreover, these days, India has consistently been working toward making the Indian rupee an international currency and Indian government has progressed significantly towards assigning this status to Indian rupee. In the opinion of certain economists, despite the split, our national currency is still in a stronger position than other currencies when analysed against the US dollar.