Question

Look at the following statements.

1. During the major part of the decade, specifically from 2008 to 2015, US Federal Funds Rates were maintained close to 0% (0 - 0.25%).
2. Due to which, there was less yield on US Treasury Bonds and because of this, FPIs invested in the bonds of emerging economies like India, so as to get the benefit of interest arbitrage.

Answer 1

US Federal Reserve used quantitative easing to overcome the liquidity crisis since the fall of lehman brothers in 2008. Maintaining the funds rates close to zero helped boost investment in the economy and revive growth. Because of the expansionary monetary policy USA came out of recession.

But due to less interest rate in USA the FPI reacted adversely by pulling out investment and investing in emerging economy like India where interest rates were higher. The higher yield in Indian government securities attracted trhe FPI.