How inflation can be reduced by controlling crr ratio i need example?

More money with bank more loans they give. More loans people take more goods they buy. More goods bought more inflation. With increase in CRR 100 bps some Rs 18,000 crores is removed from circulation. That much less money for banks to lend. so they increase interest rates. More int. rate less we borrow. Less we borrow less we spend. Less we spend less the inflation.How inflation can be reduced by controlling crr ratio i need example?
Before understanding CRR let us understand why inflation occurs?


Inflation generally occurs when the Retail prices of products such as food, clothes etc gradually rises over time. One of the factors could be due to decrease in supply of the products. When such a thing happens people generally tend to pay more to acquire the same product. Another factor could be rise in the disposable income. When the income rises the seller tries to earn extra by pricing the product a bit higher than usual. Thus inflation is affected by demand supply of product as well as money.


This example demonstrates only the simple scenario. Imagine now the entire country where there are all the institutions such as banks, corporates, retail customers and govt.


The banks are in the business of collecting deposit and lending money. CRR refers to Cash Reserve Ratio. A CRR of 6% denotes that banks have to keep atleast 6% of the deposit as cash in bank at any point of time. This also means that the bank can give out loans on this money. Thus this 6% earns 0% interest, a loss for the bank. Typically a bank receives deposits of around 100 million and 6% of this means 6 million. Generally a bank lends money at 10-15% say 10% which means a loss of 6,00,000 for the bank. Thus the 6 million lies idle in the bank strong room. Now no bank wants to lose such big amount of money, so they hike the interest rate of lending, to compensate for the loss. As a result, the popularity of the loans decreases. Thus the central bank kills two birds in one stone, it sucks out the money from the financial system by hiking CRR and indirectly reduces the credit (loan) money circulating in the financial system.


In a country like India most of the growth is due to internal consumption bourne out of credit money. It simply means that people take loans and use it for spending on everyday products. This indirectly means excess of money supply in the system which is more money chasing the same goods.


Thus hiking CRR is an effective tool for checking inflation but not the most efficient one. It is used as a short term correction tool.How inflation can be reduced by controlling crr ratio i need example?
The bank should keep more money to be deposited in the RBI so the turn over in the money outside will be reduced by the banks which lends loans to other. so the spending from the people by getting loan will be reduced. one spending is reduced the buying will become less. so the ration with demad to supply will be equal so inflation will be reduced.