Through time
series analysis of quarterly data from Q2 of 2006 to Q3 of 2020, this paper
aims to ascertain the principal driver of inflation in India. For the analysis,
the study employs new econometric approaches such as the Granger causality
test, unit root test, and the autoregressive-distributed lag bounds test. Our
estimates show that determinants such as expectations about future inflation,
oil prices, output gap, currency rate, broad money growth, interest rate and
food inflation exhibit long terms relationship with the dependent variable –
CPI inflation. Granger causality test further reveals that the determinants
such as expectations about future inflation, food inflation and money supply
granger cause CPI inflation. This study has important policy implications as
price stability not only keeps the interest rate in desired range but also
brings more predictability, and transparency in an economy, thereby promoting
higher investment and growth. Therefore, to effectively manage the inflation
dynamics, a study of the driving factors of inflation can help predict the
changes in inflation more accurately and effectively.
Citation:
Khurana, S., & Mukherjee, J. (2023). Determinants of inflation in India - a time series analysis. ASERC Journal of Socio-Economic Studies, 6(1), 26-40.