Inflation and Monetary Policy in India: Some Empirical Relations

Abstract

This paper examines the effectivity of monetary policy in controlling inflation in India during 2005:04-2014:08. Repo rate (RR), Cash Reserve Ratio (CRR) and Bank Rate (BR) have been taken as policy instruments. First, it examines the interrelation of these instruments with inflation through a graphical
analysis during 2005:04-2014:08 and through a tabular analysis over various sub periods. Then the
Pairwise Granger Causality Tests have been done among the first difference of Price (Wholesale Price
Index or WPI) and first difference of all instruments. The Granger Causality test shows that a rise in BR
and a rise in CRR cause a rise in WPI and a rise in WPI causes a rise in Repo rate. Cointegration
analysis has been done among CRR, BR, Repo and WPI. From the cointegration analysis, it has been
found that here are two cointegrating vectors and two commond trends are present among them. From
the analysis, it has been inferred that whatever little monetary policy has been used has apparently been
ineffective.
Keywords: Granger- causality, Inflation, Johansen cointegration, Monetary policy.