How does dependency injection work in Spring?

Configuration of dependencies are read from XML, annotations or Java DSL (JavaConfig). Then Spring DI engine wires the dependencies based on the metadata from the configuration using the Java reflection API.

Java components / classes should be as independent as possible of other Java classes. This increases the possibility to reuse these classes and to test them independently of other classes(Unit Testing). To decouple Java components from other Java components the dependency to a certain other class should get injected into them rather that the class itself creates / finds this object.

Class A has a dependency to class B if class A uses class B as a variable.

If dependency injection is used then the class B is given to class A via the constructor of the class A - this is then called construction injection; or via a setter - this is then called setter injection

The general concept of dependency injection is called Inversion of Control. A class should not configure itself but should be configured from outside.

A design based on independent classes / components increases the re-usability and possibility to test the software. For example if a class A expects a Dao (Data Access Object) for receiving the data from a database you can easily create another test object which mocks the database connection and inject this object into A to test A without having an actual database connection.

A software design based on dependency injection is possible with standard Java.

Spring just adds some simplifications in using dependency injection by providing a standard way of providing the configuration and by managing the reference to the created objects.

For more read this

Edit1:

When Spring initializes its context it creates all the beans defined eager in Spring application context.xml file. Now suppose your Bean A has dependency of B then the Obj of B is already with Spring as it has been created successfully while Spring initialization. Then Spring will search for setter method in class A and will set B's Obj there.

Edit2:

Please read 5.4.1 Setter Injection