How Inflation and Interest Rates Are Related to Economic Growth? A Case of India

Abstract

This study investigates how inflation and interest rates are related to economic growth of India. The different economic theories state that inflation and interest rates are associated with economic growth based on economic conditions of the nation. Based on the above, this research examines the influence of inflation and interest rates on India’s economic growth. This study is based on annual time series data for the period from 1992 to 2015. While analyse the data, correlation, ADF and PP unit root tests, cointegration test, vector error correction model and Granger causality test have been used. The empirical results confirm that there exists long run causality from economic growth to inflation and interest rates and also exist a unidirectional causal movement from economic growth to interest rates. The findings of the studies offer a few directions for Indian government and policymakers on the consequence of keeping low inflation and most advantageous interest rate in the present condition of Indian economy so that the economic growth is promoted. The paper includes implications for the economic growth; the Reserve Bank of India controlled the inflation rate and unchanged the interest rate. This research fulfils a well-known need of how inflation rate and interest rate helpful for economic growth.