I am a layman in this area, I always wonder how raising CRR controls inflation. The theory that is put forward is it absorbs cash from the system and hence people spend less to bring down the inflation.But my question is, I will spend less on groceries and etc. expenses that are in my hand but what about more EMI I have to pay to bank on housing loan ? isn't it like pay one way or the other but just they manage the figures to keep statistians happy ?
RE:RE:How raising CRR controls Inflation ?
by gaurav saxena on Apr 28, 2008 12:42 PM Permalink
The increase in EMI which is paid due to rate increase(CRR hike) goes to RBI vaults as a reserve. It basically means that banks need to have xxx amount in store before giving out (1-CRR)*xxx. This effectively sucks out money from economy and places it in a vault causing a decrease in money supply and hence less money chasing same number of goods, so goods become cheaper now
RE:How raising CRR controls Inflation ?
by aoneall on Apr 28, 2008 01:05 PM Permalink
You have to first understand what inflation is? Inflation is increase in supply of money without corresponding increase in supply of goods. Too much money chasing too few goods. That drives prices up. Now, increase in CRR means less availability of money to lend and it means less buyers of goods and it means prices going down. If you look closely at the sale of most of the items in the market (automobiles, machinery etc) you will notice that most of it is financed by the lending agencies, meaning banks. So, you can very well understand if banks have less money to finance then it means fewer buyers in the market. Thus supply remaining same, with less number of buyers, prices will come down.
RE:How raising CRR controls Inflation ?
by shiva kumara on Apr 28, 2008 12:45 PM Permalink
If you are paying an EMI that means you are rich guy. The whole point of controlling the inflation is to protect poor at the cost of so called rich.
RE:RE:How raising CRR controls Inflation ?
by zia on Apr 28, 2008 02:12 PM Permalink
Friend you are absolutely right, These govt really do not think positive of the people who are trapped in loans by Banks. they are paying the money from their hard work and these people are enjoyng, I think these govt. should comr down
RE:How raising CRR controls Inflation ?
by zia A on Apr 28, 2008 02:21 PM Permalink
The worst part is that we can do not have option to raise our voice also. We can not complaint to anybody. These (Govt bank) always do forceibly impose.
RE:RE:How raising CRR controls Inflation ?
by zia A on Apr 28, 2008 02:30 PM Permalink
People who are trapped in loan net can not do anything except cursing them and paying them. Only a miracle from GOD can save them
RE:How raising CRR controls Inflation ?
by ware vm on Apr 28, 2008 12:44 PM Permalink
What I understand is, it goes like this, when you get good interest in banks, you start saving, that pull down the cash from the market, Also when loan is available at cheap interest, people start taking loan for every damn reason, which also increases the demand in the market and so the prices.
Now come to your loan aspect, now since the interest has gone up, you will very soon cut down on your luxury expenses and will concentrate on necessities and loan repayment. This way it will again bring down the demand and so price.
But the only negative aspect is, more interest rate means industries have to pay more on borrowings and so it might put industries to decide on whether to increase the prices or keep the price same as demand is reduces and bear the less profit.
So this whole process lows down the economy a bit.
It is not so simple but this is the basic theory, but if you add consume behavior in it, things become more complex
RE:RE:How raising CRR controls Inflation ?
by shiva kumara on Apr 28, 2008 12:48 PM Permalink
That is true if the inflation is due to the luxury items. But when the inflation is for the food items how can you control like this?
RE:How raising CRR controls Inflation ?
by Robin Joseph on Apr 28, 2008 12:52 PM Permalink
See, Inflation is defined as a rise in the costs of good and services. Inflation is caused by an expanding economy when spending is high and the production of goods and services is not meeting demand.
So basically, there is a lot of money in the market and no goods to supply. What CRR or th Cash Reserve Ratio does is that the bank now has to hold back more money. If the reserve requirement is 10%, for example, a bank that receives a Rs. 100 deposit may lend out Rs. 90 of that deposit. If the borrower then writes a check to someone who deposits the Rs. 90, the bank receiving that deposit can lend out Rs. 81. As the process continues, the banking system can expand the change in excess reserves of Rs. 90 into a maximum of Rs. 900 of money (Rs. 90 Rs. 81 Rs. 72.90 ...=Rs.900). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial Rs. 100 deposit into a maximum of Rs. 500 (Rs.80 Rs.64 Rs.51.20 ...=Rs.500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.
