Determinants of inflation in India

The paper attempts to identify the determinants of inflation in India in a multivariate econometric framework using quarterly data from Q1: 1996-1997 to Q3: 2013-2014. The identified determinants of domestic inflation such as crude oil prices, output gap, fiscal policy and monetary policy, and their relation with inflation is studied in a structural vector auto regression (SVAR) model. Further, the temporal changes in inflation dynamics are analyzed using a time varying parameter SVAR model with stochastic volatility. It was found that inflation dynamics in India have changed over time with various determinants showing significant time variation in the recent years, particularly after the global financial crisis.