Quantitative easing

Also called: QE · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT

Meaning

Quantitative easing (QE) is when a central bank buys government bonds and other assets on a large scale and pays for them with newly created money. The aim is to push down long-term interest rates and put more money into the banking system.

• Why it matters: central banks use QE when cutting the short-term policy rate no longer works. This happens when the rate is already close to zero, or when financial markets have frozen. Because QE is meant to be temporary and reversible, it is different from printing money permanently.

Explanation

Why QE is needed

• Conventional monetary policy means changing the short-term policy rate. In India this is the repo rate (the interest rate at which the RBI lends money to banks for a short time).
• Zero lower bound (ZLB): a policy rate cannot usually go much below 0%. If it did, people would simply hold cash, which earns 0%.
• Liquidity trap: rates are already very low and people prefer to hold cash. Adding more money does not lead to more borrowing or spending.
• Frozen markets (2008 global financial crisis, 2020 COVID shock):
• the policy rate changes → but loan and bond rates do not follow
• this is called broken transmission

• so credit does not reach firms

• QE is one tool of unconventional monetary policy. This means any tool beyond changing the short-term rate. It works through the central bank's balance sheet (the list of what it owns and what it owes).

How QE works

• Channel 1: bond yields fall
• The central bank buys bonds on a large scale → demand for bonds goes up.
• Bond prices rise → long-term yields (the interest return a bond gives) fall.

• Home loans and company borrowing become cheaper → spending and investment are supported.

• Channel 2: more bank reserves

• The central bank pays sellers with new money → banks hold more reserves (money kept with the central bank).

• Banks have more money to lend.

• Worked example (illustrative): why buying bonds lowers yields

• A bond pays ₹7 of interest a year and costs ₹100. Yield = 7 ÷ 100 × 100 = 7%.
• QE buying pushes the price up to ₹105. The bond still pays ₹7, so the yield becomes 7 ÷ 105 × 100 ≈ 6.67%.
• Rule: bond price up → yield down. This is how QE lowers long-term rates.

Key features and global examples

• QE sets a quantity. The central bank decides how many bonds to buy. It does not fix a price.
• It is temporary and reversible. The bonds can later be sold, or the central bank can let them mature (reach their end date).
• Examples:
• Bank of Japan (BoJ), 2001-06: the first major QE
• US Federal Reserve: QE1-QE3 (2008-14), and again in 2020
• European Central Bank (ECB): 2015

• Bank of England

• The exit, quantitative tightening (QT): the Fed shrank its balance sheet in 2017-19 and again in 2022-25. By 2026 the IMF recorded that the Fed had stopped its balance-sheet runoff and begun reserve management purchases (small bond purchases to keep enough reserves in the banking system) [6].

Costs and risks

• Asset-price bubbles: cheap money can push up share and property prices too far.
• Wider inequality: people who own assets gain the most.
• Difficult exit: reversing QE can cause shocks. One example is the 2013 taper tantrum (see Mains Points).

In India

India never cut its rate to zero or below, so the RBI never ran open-ended, Fed-style QE. Mainly during 2019-21, it used smaller, bounded versions of the idea.

• G-SAP 1.0 and 2.0 (2021), India's "QE-lite"
• G-SAP (G-sec Acquisition Programme): the RBI promised in advance to buy a fixed amount of G-secs (government securities).
• G-SAP 1.0: ₹1 lakh crore in Q1 2021-22. It was announced on 7 April 2021 "to enable a stable and orderly evolution of the yield curve". The first auction was on 15 April 2021, for ₹25,000 crore [2].
• G-SAP 2.0: ₹1.2 lakh crore in Q2 2021-22. The first auction was on 8 July 2021, for ₹20,000 crore, in five G-secs maturing between 2027 and 2033 [3].

• Total: ₹1 lakh crore + ₹1.2 lakh crore = ₹2.2 lakh crore of pre-committed purchases.

• Why G-SAP was only "QE-lite":

• It had a fixed size and lasted for a limited time.
• The RBI bought in the secondary market (from existing bondholders), not directly from the government.

• Its stated aim was a smooth yield curve (a line showing the interest rates on bonds of different maturities), not large-scale money creation.

• Related RBI tools in the same period:

• Special OMOs (December 2019 - 2020): India's version of Operation Twist. An OMO (open market operation) is when the RBI buys or sells G-secs to add or remove money. In one example tranche (auction on 3 September 2020), the RBI bought 7.72% GS 2025, 6.79% GS 2027 and 5.79% GS 2030. At the same time it sold 182-day Treasury Bills, in two tranches of ₹10,000 crore each [1].

• TLTROs (March 2020): cheap loans to banks of up to ₹1,00,000 crore, for up to 3 years. Banks had to put the money into corporate bonds, CPs and NCDs [4][5].

• The 2020 deficit monetisation debate: some argued the RBI should directly fund the government's deficit. India instead relied mostly on indirect support through OMOs and G-SAP in the secondary market.

Don't confuse with

• Helicopter money: QE is temporary and reversible, because the bonds can be sold later. Helicopter money is permanent: new money is given directly to the public, or it finances government spending and is never taken back (idea from Milton Friedman, 1969).
• Quantitative tightening (QT): this is the reverse of QE. The central bank shrinks its balance sheet. It either sells assets or lets bonds mature without reinvesting the money ("runoff").
• Yield curve control (YCC): QE fixes the quantity of bonds to buy. YCC fixes the price (a target yield) and buys as many bonds as needed to hold it. Example: BoJ on the 10-year JGB (Japanese Government Bond), 2016-24.
• Operation Twist: QE adds money to the system. Operation Twist buys long-term bonds and sells short-term ones at the same time, so net liquidity is unchanged. Fed examples are 1961 and 2011-12. The RBI's version is the special OMO.

Prelims Hooks

• QE = large-scale asset purchases paid for with new central bank money. It targets a quantity, is reversible, and is mainly used near the zero lower bound.
• First major QE: Bank of Japan, 2001-06. Fed: QE1-QE3 (2008-14) and 2020. ECB: 2015.
• G-SAP 1.0 = ₹1 lakh crore (Q1 2021-22). G-SAP 2.0 = ₹1.2 lakh crore (Q2 2021-22). Total ₹2.2 lakh crore, bought through the secondary market [2][3].
• QT does not need any selling. The central bank can just let bonds mature without reinvesting. The Fed's QT rounds were 2017-19 and 2022-25. By 2026 the Fed had ended runoff and begun reserve management purchases [6].
• Trap: "The RBI has adopted a negative interest rate policy." False. India never went to a zero or negative rate. Only the ECB (2014), the BoJ (2016-24) and a few others did.
• Taper tantrum (May 2013): Fed Chair Ben Bernanke hinted at slowing ("tapering") QE purchases. The rupee fell to about ₹68.8/$ by August 2013, and India was named among the "Fragile Five".

Mains Points

• Uses and limits of QE: when policy rates hit the ZLB or markets freeze, QE repairs transmission by lowering long-term yields. The costs are asset bubbles, wider inequality (asset owners gain most) and a difficult exit. India's bounded approach (G-SAP, special OMOs, TLTROs) lowered long-term yields during COVID-19 without open-ended QE. This protected the inflation-targeting framework and the RBI's credibility (GS-III: monetary policy).
• Global spillovers: QE and QT in advanced economies drive money into and out of emerging markets.
• Fed signals a taper (2013) → US yields expected to rise → foreign investors pull money out of India → the rupee falls
• RBI response: MSF raised to 10.25% (July 2013) and the FCNR(B) swap window (September 2013)

• Lesson: India needs large forex reserves, sterilisation capacity (the RBI offsetting the effect of forex operations on domestic money, usually through OMOs) and a manageable current account deficit (GS-III: external sector).

• Monetary-fiscal boundary: QE buys bonds in the secondary market and can be reversed. Direct deficit monetisation is permanent and funds the government directly. The 2020 debate showed the pull between quick crisis funding and central bank independence. It links to the FRBM framework and the end of ad hoc Treasury Bills in 1997, when the RBI stopped automatically financing the government (GS-III: fiscal policy; GS-II: independence of statutory bodies).

Related concepts

• Unconventional monetary policy
• Quantitative tightening
• Negative interest rate policy
• Yield curve control
• Operation Twist
• Helicopter money
• Taper tantrum

Read more

• Unconventional monetary policy: the global toolkit and India's use of it