Can any explain me how Rapo rate and CRR are related to inflation rate? thank you?

Question

yesterday ,RBI hikes the Rapo rate by 50 basis point and CRR by 25 basis point saying that to control the inflation it is necessary to hikes the rates! Now how it will effect the inflation rate is far beyond my understanding! So please help me to understand!

Answer 1

Reserve Bank of India sets repo rates (repurchase) higher to make money more expensive to re-borrow (prolong borrowing) again thus making money less available for banks and consequently reducing money supply using this instrument.

Higher rates for banks makes money more expensive to borrow for other money-market participants too. It reduces investment and credits for public - thus reducing disposable income and consequently reduces aggregate demand. But fall (or slow-down in it's growth) of aggregate demand lowers inflation rate.

Cash Reserve Ratio for banks affects size of multiplier. Increase of CRR reduces multiplier thus reduces money-supply. Effect of fall in money supply I've described before (in repo-rates).