The Dynamics of Inflation in India:A Bounds Test Analysis

This paper investigates all the possible determinants of inflation (weighted average call money rate, food inflation, fuel and power inflation, gross fiscal deficit, trade openness, exchange rate, GDP per capita annual growth rate and world food inflation) and their impact in the long and short run in India. Using yearly data for the period from 1990 to 2016, we have employed bounds testing (ARDL) cointegration approach. Our main findings are that all the selected determinants are cointegrated with inflation in India. The error correction term with negative sign shows high speed towards equilibrium. In the long run exchange rate, world food inflation and money supply significantly contributed to increasing inflation. In the short run except for the weighted average call money rate and GDP per capita annual growth rate, all the variables play a significant role in determining inflation. The study suggests enhancement of production and productivity of agricultural commodities, especially of pulses, and management of exchange rate fluctuation that plays a multilateral role in the price management of an open economy like India.