DETERMINANTS OF INFLATION IN INDIA IN A DYNAMIC SETUP

Abstract

The present study empirically examines the factors accounting for inflation in India in an open economy framework by utilizing the bounds testing approach to cointegration for the 2006: Q3-2019: Q4 period. The findings reveal the existence of a long-run relationship with the household survey-based inflation expectation, real output, narrow money aggregate and interest rate as important determinants of inflation. The study concludes that inflation is well explained by a combination of structural and monetary factors. Notably, the significance of inflation expectation as an important explanatory variable corroborates the utilization of inflation forecast by the RBI as an intermediate target in the flexible inflation targeting framework. In this backdrop, it is imperative for RBI to conduct a high frequency inflation expectations survey of households to account for frequent information updation on the part of certain groups of households.