Question { CitiGroup, 4367 }

How CRR rate hike will help to reduce Inflation rate.

Answer

CRR rate is a rate at which commercial banks has to keep
their % portion of total funds with the RBI. When RBI hikes
the CRR rate, banks has to keep more with the RBI, so the
balance in hands of commercial banks reduces..So the amount
which a bank cud lend will be less now in the hands of
borrowers....as a result the liquidity will reduce and
people demand for goods will reduce and when the demand
will reduce prices of commodities will come down....and
finally inflation will come down....so whenever govt/RBI
takes any decision for sucking the liquidity, it means it
wants to curb the inflation....