Too early to tell if QE succeeded: RBI

The Executive Director of Reserve Bank of India, Deepak Mohanty, has cautioned against the continuation of unconventional monetary policy for long.

Addressing a seminar at the Reserve Bank of India Staff College here on Thursday, he said that exiting QE (quantitative easing) increased uncertainties in the global financial market. “It is increasingly felt that continuation of unconventional monetary policy for long could create risks in the global economy it sought to address by preventing de-leveraging and appropriate pricing of risks,” he said.

Further, the current policy response had increased sovereign risk in a number of countries, which circumscribed the ability of policy to cushion further unexpected shocks, he pointed out.

The global financial crisis, Mr. Mohanty said, triggered an unprecedented policy activism by advance country central banks. They resorted to unconventional monetary policy of the nature and scale unthinkable hitherto, he pointed out. “As we complete over five years of unconventional monetary policy of QE and CE (credit easing), the question is: did it succeed? While it is too early to say, opinion remains divided,” he said.

With unconventional policies, the central banks had been far less successful in stimulating growth, he said. While it might not have improved general monetary transmission and prompted sustainable recovery, it did, however, have significant impact on the financial market, he added. “The counter-factual of what would have happened without QE is not known. In any case, it seems to have prevented a deeper recession,” he said.

Though developed economies and EMEs resorted to conventional and unconventional monetary measures, there were differences in terms of their timing, types and magnitudes. In the advanced economies, the switchover was from conventional monetary tools to unconventional measures . In many EMEs, however, unconventional foreign exchange easing and domestic liquidity- augmenting measures preceded the conventional measures of policy rate cuts, he said. Again, central banks in EMEs relied mostly on direct instruments to ease domestic liquidity, those in advanced countries resorted to various liquidity providing operations through relaxation of counter-parties, collaterals and maturity, he pointed out. Central banks in advanced countries extensively used credit and quantitative easing measures. This had led to large expansion of their balance sheets unlike in EMEs, he pointed out.

``In advanced economies, fiscal support aimed at rescuing the financial sector from the crisis situation. In EMEs, however, they were generally meant to address the deficiency in aggregate demand,’’ he said.

The spill-over effect of QE on commodity markets and emerging market economies (EMEs) had been significant, he said.