BharatNotes What is Quantitative Easing?
Quantitative Easing (QE) is an unconventional monetary policy in which a central bank creates new central-bank money to buy large, predetermined quantities of financial assets — primarily long-term government bonds, and sometimes mortgage-backed securities or other instruments. By expanding its balance sheet, the central bank injects liquidity into the banking system, pushes down long-term interest rates and aims to revive lending, investment and demand. QE is deployed only when conventional tools are exhausted — typically when short-term policy rates have already fallen close to zero ("the zero lower bound").
Why and How It Works
When a central bank cuts its policy rate to near zero and the economy still needs support, it turns to QE. The mechanics are straightforward: the central bank purchases bonds from banks and financial institutions, crediting their accounts with newly created reserves. This raises bond prices, lowers their yields, and lowers the broader cost of long-term borrowing. The intended effects are:
- Increased liquidity and lending capacity in the banking system
- Lower long-term interest rates, encouraging investment and consumption
- Higher asset prices and a "portfolio rebalancing" toward riskier assets
- A signalling effect that policy will stay accommodative
QE is expansionary; its reversal — selling assets or letting them mature — is called Quantitative Tightening (QT).
Global Experience
| Central bank | Period | Notable feature |
|---|---|---|
| Bank of Japan | From March 2001 (to 2006) | First-ever QE programme; targeted current-account balances |
| US Federal Reserve | 2008–2014 (three rounds, "LSAPs") | Bought Treasuries and agency mortgage-backed securities |
| Major central banks | 2020 (COVID-19) | Renewed large-scale asset purchases |
The Bank of Japan introduced QE on 19 March 2001 as the first central bank to do so. The US Federal Reserve adopted Large-Scale Asset Purchases (LSAPs) from late 2008 after the Global Financial Crisis, and central banks again expanded balance sheets during the 2020 pandemic.
The India Angle: G-SAP
The RBI has historically relied on Open Market Operations (OMOs) rather than formal QE, partly because India typically faces inflationary, not deflationary, conditions. During the pandemic, however, the RBI launched the Government Securities Acquisition Programme (G-SAP) in April 2021, under which it committed in advance to buy government securities of a fixed amount each quarter to stabilise bond yields.
- G-SAP 1.0: purchases of ₹1 lakh crore committed for Q1 of FY 2021-22
- G-SAP 2.0: ₹1.2 lakh crore committed for Q2 of FY 2021-22
Unlike routine OMOs (which inject or withdraw liquidity as needed), G-SAP gave a calendared, upfront commitment, which is why analysts likened it to "QE with Indian characteristics." The RBI itself has been careful to distinguish G-SAP from QE, noting that developed-economy QE addresses near-deflationary conditions, unlike India's.
UPSC Angle
QE is a core building block for GS3 monetary-policy questions. Aspirants should clearly separate QE from OMOs, repo rate changes and CRR/SLR tools, and link it to bond yields, the money supply, inflation, exchange rates and the "taper tantrum" effect on emerging-market capital flows. Understanding why India relies on G-SAP/OMOs rather than full QE is a frequent analytical theme.
