The first line of the sixth paragraph states that the Indian central bank has tried to counter
Question:
The first line of the sixth paragraph states that the Indian central bank has tried to counter the inflationary pressures from expanding the money supply by "raising the reserves [that banks] must lock up in its vaults." Identify and briefly explain the economic mechanism through which an increase in reserve requirements would depress money supply growth.
Paragraph:
The Reserve Bank of India (RBI), the country's central bank, has done its best to resist the appreciation, and, at the same time, contain inflation at home. As any student of macroeconomics knows, central banks struggle to achieve both objectives simultaneously in the face of strong inflows of capital. Printing rupees to buy the incoming dollars keeps the currency cheap but also adds to the money supply, stoking inflation. To avert this danger, the RBI has tried to claw back the extra money by selling "sterilisation" bonds to banks and raising the reserves they must lock up in its vaults. But this sterilisation effort is hard to maintain. The RBI intermittently pauses for breath, letting go of the rupee. The market, anticipating its exhaustion, only tests it all the harder
Financial Accounting An Introduction to Concepts, Methods and Uses
ISBN: 978-1133591023
14th edition
Authors: Roman L. Weil, Katherine Schipper, Jennifer Francis