The Impact of External and Internal Market Forces on Inflation in India : An Empirical Investigation

The identification of external and internal determinants of inflation is a perplexing task. Moreover, the spillover impact of these determinants generates indecisiveness in measurement. Therefore, the present paper tries to identify the impact of external and internal determinants of inflation in India by using the time series data from 1978 to 2015. In order to assess the short-run and long-run impact of selected variables, an Autoregressive Distributed Lag (ARDL) bounds approach has been adopted. The ARDL bounds method allows investigating the impact of external and internal determinants on inflation in India and provides long-run stability in the system. The results of the study found that oil consumption has a direct impact on domestic prices. Similarly, due to the increase in employment, inflation tends to increase in the long run. Further, the relationship between deficit financing and the domestic price is found to be negative and significant, whereas the impact of Foreign Direct Investment (FDI) on domestic price is found to be inconclusive in the long run