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India’s Quantitative Easing: 16% per year since 1997

We’ve all heard about “Quantitative Easing” in the west. The US is printing $85 billion a month to buy government bonds, mortgage backed securities and assets of a longer term nature. The Japanese Central Bank is printing $75 billion a month and buying even equity instruments. Europe, without a fixed monthly buying programme, still allows loans to banks for upto three years, against assets of questionable quality.

India has had its own version of quantitative easing, if you define quantitative easing as the expansion of the central bank balance sheet through buying of assets. This is how the Bank of England defines easing – in terms of “injection of money into the economy through buying of assets”. (Technically many may not subscribe to this definition, but I think it’s relevant) Our “QE” has not been only recent. We have “eased” since 1997, with the RBI expanding it’s balance sheet at 16% per annum since 1997.



It’s grown from 2.3 trillion rupees (2.3 lakh crores) to more than 23 trillion in a span of about 16 years. 10x expansion in this time.

Quick Primer: What *is* the RBI Balance Sheet?

The RBI, like any other entity, has assets and liabilities. When it prints rupees, it is a liability of the RBI. That’s why the RBI printed rupee notes say “I promise to pay the bearer as sum of…”. The RBI owes you that money and when you use the note to pay for something, you transfer that liability to someone else.

Similarly, what banks place as deposits with RBI as “CRR” or “Cash Reserve Ratio” requirements is a liability of the RBI. 

However, the RBI can’t just print notes without reason. It has to have something on the other side, an “asset”. The assets largely are: Foreign currency holdings, Gold and Indian Government Debt.  The RBI may print Rs. 100 to buy some US Dollars in the market. The RBI may print Rs.100 to buy government bonds in Open Market Operations. In either case, liabilities go up by Rs. 100 (printed money) and assets by Rs. 100 (Forex reserves or Govt bonds)

The size of the balance sheet – or really, the growth of it – could create serious inflation. As more money (rupees) becomes available, it chases roughly the same goods (there is potentially some productivity benefit so more goods are created) which causes prices to inflate.

If you look at the RBI Asset distribution over the last 15 years, the spread gives you reason to think:


From a 50% exposure to government bonds, India moved viciously towards buying forex. But no matter how you look at it, the RBI was fuelling longer term inflation – as the increased supply of rupees from printing made its way into the local economy.

If we baseline all data to 1997, you find distinct times of different kinds of QE that we’ve done, and just one point when central bank balance sheets remained benign.



The First Stage 1997-2001: The forex crisis in 1992 caused the RBI to continue purchases of dollars, but it maintained a high proportion of government securities. Average growth of balance sheet: 15% p.a.. Ended with 40% govt bonds, 48% forex holdings. Inflation was between 2% (July 1999) and 8.7% (Jan 01)

The Second Stage 2001-2008: RBI bought tons of foreign exchange which was flooding the country in the vain hope that it could retain India’s export competitiveness holding the dollar at 40+. In the process it reduced government bond holdings to as low as 5%, with forex holdings at 90% of its balance sheet. The reduction was not by selling government securities; but by nature, government securities mature and are redeemed. The RBI just doesn’t replace them by buying more.

Inflation was benign – the increase in rupees during 2004 to 2007 due to buying of forex was “sterilized” by using a Market Stabilization Scheme. What that did was ensured the rupees would flood the economy when the MSS expired, just delaying the flood, not stopping it.

Average Balance Sheet Growth: 20% per year. Inflation was less than 8%, and it seemed like RBI had found the right balance.

The Third Stage 2008-2010: Forex reserves fell from 13 trillion to 11 trillion rupees, largely because the rupee appreciated back up and that the global crisis required the RBI to sell dollars as foreign participants exited. However, rupee holdings weren’t shored up at this time to balance, and the balance sheet was actually flat for two years. This is when inflation went nuts on both ends – going as high as 11% in the oil spike of 2008, down to –0.4% in June 2009.

The Fourth Stage 2010-now : This is when RBI has dramatically stepped up the buying of local securities, as forex reserves denominated in rupees go up substantially due to rupee depreciation (the RBI hasn’t bought quite that much). Either ways, the balance sheet size has increased in rupee terms, moving 50% from 15 trillion to 23 trillion in less than three years.


Our dear RBI Governor, Dr. Subbarao, mentioned in a policy teleconference recently that India is not doing any form of quantitative easing. But it’s evident we are doing some form of it, though we aren’t really buying non-government assets or equities. The RBI now holds about 16% of outstanding government debt, which is the highest since 1992 (or so it seems, from RBI’s annual data).

Some of the government holdings of the RBI may mature soon. I can’t find the maturity profile of the RBI holdings anywhere (help?), but as they mature, the RBI should ease off on subsequent purchases, and keep the dollar holdings steady or down.

Increasing the balance sheet size temporarily is fine – Sweden had seen a quadrupling of its central bank balance sheet in 2008, but has since reduced the size by 50%.  RBI, however, seems to have no appetite to cut down the balance sheet size. The government on the other hand wants to keep prices up at any cost, and introduces measures like the Food Security Bill and handouts to any section of the population that can vote.

In this light, it is the country that suffers; and it is why our brilliant one rupee coin will soon go out of existence. We’ve grown through the 16% per year inflation cycle and don’t think of this as not-ordinary; we are, in effect, the children of monetary easing. Will things change?

  • lohit says:

    16%p.a ! A fair chunk of that has probably gone into real estate and caused the absurd prices that we see today, especially in land. Landprices in our metro’s are comparable to NY, Sydney, etc, whereas our average incomes are nowhere near those.
    If there is a financial crisis here or say the US continues to recover faster, then the dollars will start to flow out. Wonder how much this will hurt the rupee or how much interest rates will have to rise to protect it.
    When UK left the ERM in 1992, interest rates had to be raised 200bp in under a week. That too did not prevent a run on the pound.

  • JK says:

    I think QE is where Central Bank buy from market its own bonds issued earlier thereby creating dual (or more) liquidity for same instrument. Its different from size of Balance sheet?

  • Adheer Pai says:

    “Our dear RBI Governor, Dr. Subbarao, mentioned in a policy teleconference recently that India is not doing any form of quantitative easing.”
    Considering our GDP growth (around 6%) and inflation (around 8%), I think increasing the money supply by 16% is very conservative for a growing economy like ours.

    • You’re conflating cause and effect. The central bank causes inflation by expanding its balance sheet like this. The inflation isn’t a temporary thing, it’s inbuilt. Unless the central bank removes liquidity we won’t see lower inflation. The 6% growth number is a chimera now – we have reached a stage where nominal grwoth is 12% and CPI inflation is 9.5% – growth is now going to be all inflation! It’s not because of last year, it’s because of the last 16 years.

  • Ravi Shankar says:

    Wonderfully researched and well presented. I keep telling everyone that RBI is one of the biggest quantitative easer, with tremendous increase in base money compounding at about 15-16%. We experience it as inflation or loss of purchasing power of the currency. I subscribe to the Austrian School of economics. In my view this whole fractional reserving system is a fraud. A constant wealth transfer happens from the people to the banks who can create credit aka cheque money aka money out of thin air. Please consider watching the video “Money as debt” on youtube. That one video gave me more insight into the money system than all the economics courses I took in my life 🙂 !

  • fubar says:

    One question Deepak.
    The Indian GDP has also gone up like 5 times in this period with a CAGR of 10% approx. If RBI printed less than 10% per year then currency would have actually appreciated. Is that a correct line of thinking?
    If yes then the inflation is actually 6% YOY which itself is a big number specially given the time period of 15 years. And then there is the problem of unequal distribution of money in various asset classes.

    • Inflation since 1997 is about 6% annualized, correct. Of course that’s WPI. CPI is much higher.
      Any QE causes only the rich to get richer. The best thing is really the direct transfer like NREGA – it is a far better alternative than the RBI printing, to be honest.

  • Vamsy says:

    I find it amusing this sentence – “But it’s evident we are doing some form of it, though we aren’t really buying non-government assets or equities”. Our government bonds are toxic in itself. Our Rupee denominated bonds has no foreign takers and our Sovereign rating is a joke. I think it is a sin itself that RBI is printing money to fund our corrupt government, we all know where all this will lead to…

  • kaustuk says:

    Hi Deepak,
    Can you please show if there is correlation between equity market movements and RBI’s balance sheet expansion in the 4 stages as shown by you.

  • H Manatee says:

    In my view there is absolutely nothing wrong with the fractional reserve banking. The problem that we see today is the asset-liability mismatch in our banking system. Banks borrow short and lend long. They take savers’ money in 5 year FD (for example) and lend on a 20 year mortgage, fiddling with rolling the liability (from new savers) to cover the other 15 years of that un-backed mortgage. In the short-term it works but this rollover eventually grows so large that the entire monetary edifice collapses. We are only a few years away from seeing the climax.
    A saver spends less than he earns and keeps the rest in a bank which becomes the “capital” backed money. But when banks create money out of thin air to fill the asset-liability mismatch it creates bubbles when that counterfeit credit enters the economy. If assets and liabilities match, in the end, the credit vanishes so it can not cause any inflation.
    Money/credit created without a saver involved is what caused inflation. Sooner or later it blows in the face.

  • Inder says:

    How does RBI’s so called QE affect the Currency movement ? With all the ecomomies flooding the market with more money and India being a larger export economy, won’t we suffer as a result of RBI’s QE ?

  • DPM says:

    I think the most important part is BOND monetization which was started by UPA and accelerated by Subbarao in UPA II. Under NDA the BOND portfolio shrinks. Buying USD by printing Rupee is not a bad idea. Same thing was done by China. Inflation can be easily controlled by increasing CRR when you buy Dollar and print Rupee. But not by monetizing via Bonds as the Bond money leaks directly to inefficient people’s purchasing power. China also had inflation when they stimulated after 2008 . Till 2008 , inflation was fine in china.Excellent work.