Donald ("Skip") Conover's Page

Do increased bank reserve requirements shut down inflation, or merely put the brakes on an economy?

The Reserve Bank of India recently raised the so-called "repo rate," the reserves banks are required to maintain on hand, as one measure to fight India's inflation, which hit 11.63% in the July 4, 2008 reporting. Dr. Amit Mitra, Secretary General of FICCI, recently firmly stated his opposition to this increase.

From my perspective, it appears that an increase in the reserve requirement tends to shut down an economy, because it makes it more difficult for businesses to maintain a debt component on their balance sheets, thereby reducing their flexibility. Of course, if an economy shuts down, it does seem likely that inflation will also tend to be reduced over time, but it seems an overly painful method of doing so. What do you think?