Journal of Finance and Accounting
ISSN (Print): 2333-8849 ISSN (Online): 2333-8857 Website: http://www.sciepub.com/journal/jfa Editor-in-chief: Apply for this position
Open Access
Journal Browser
Go
Journal of Finance and Accounting. 2016, 4(1), 20-26
DOI: 10.12691/jfa-4-1-3
Open AccessArticle

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

Amalendu Bhunia1,

1Department of Commerce, University of Kalyani, Nadia, West Bengal

Pub. Date: December 23, 2016

Cite this paper:
Amalendu Bhunia. How Inflation and Interest Rates Are Related to Economic Growth? A Case of India. Journal of Finance and Accounting. 2016; 4(1):20-26. doi: 10.12691/jfa-4-1-3

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.

Keywords:
economic growth inflation interest India vector error correction model

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Anand, R. and Tulin, V. (2014). Disentangling India’s Investment Slowdown. IMF Working Paper, retrieved from https://www.imf.org/external/pubs/ft/wp/2014/wp1447.pdf.
 
[2]  Awe, O. O. (2012). On Pairwise Granger causality Modeling and Econometric Analysis of Selected Economic Indicators, [taken online] Available: interstat statjournals.net/year/2012/articles/1208002.pdf, 1-17.
 
[3]  Barro, R.J. and Becker, G.S. (1989). Fertility Choice in a Model of Economic Growth. Econometrica, 57, 481-501.
 
[4]  Bhunia. A. (2013). Cointegration and Causal Relationship among Crude Price, Domestic Gold Price and Financial Variables: An Evidence of BSE and NSE. Journal of Contemporary Issues in Business Research, 2(1), 1-10.
 
[5]  Bhunia, A. (2014). How Does WTI Crude Oil Affect Economic Growth of India?. Applied Economics and Business Review, 1(4), 94-98.
 
[6]  Bruce E. H. and Ananth, S. (2013). Uncovering the Relationship between Real Interest Rates and Economic Growth. Retrieved from http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp303.pdf.
 
[7]  Doguwa, S. I. (2012). Inflation and Economic Growth in Nigeria: Detecting the Threshold Level CBN. Journal of Applied Statistics, 3(2), 99-114.
 
[8]  Dorrance, G. S. (1966). Inflation and Growth. Working Paper. International Monetary Fund, 13, 82-102.
 
[9]  Gokal, V. and Haniff, S. (2004). Relationship between Inflation and Economic Growth. Working paper, Economic Department of Fiji, 1-51.
 
[10]  Hasanov, F. (2010). Relationship between inflation and economic growth in azerbaijani economy: Is there any threshold effect?. Asian Journal of Business and Management Sciences, 1(1), 01-11.
 
[11]  Hussin, M. Y. M, Muhammad, F, A Razak, Abdul, Tha, G P and Marwan, N. (2013). The Link between Gold Price, Oil Price and Islamic Stock Market: Experience from Malaysia, Journal of Studies in Social Sciences, 4(2), 161-182.
 
[12]  Ideasmakemarket (2016). RBI’s Interest Rate Policy and its Impact on Indian Economy. Retrieved from http://ideasmakemarket.com/2013/07/rbis-interest-rate-policy-and-its-impact-on-indian-economy.html.
 
[13]  IIFL (2016). Economics for Everyone - Interest Rates and Inflation. Retrieved from http://www.indiainfoline.com/article/bschool-gurugyan/economics-for-everyone-interest-rates-and-inflation-1454299_1.html.
 
[14]  Inyiama, O. I. (2013). Does Inflation Weaken Economic Growth? Evidence from Nigeria. European Journal of Accounting Auditing and Finance Research, 1(4), 139-150.
 
[15]  Johansen, S. (1988). Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics and Control, 12 (2-3), 231-254.
 
[16]  Keynes, John Maynard (1930). Treatise on Money. Nature (London: Macmillan) 127(3216), 90. Bibcode:1931Natur.127..919M.
 
[17]  Luutkepohl, H., & Saikkonen, P. (2000). Testing for the cointegrating rank of a VAR process with a time trend, Journal of Econometrics, 95, 177-198.
 
[18]  McKinnon, R.I. (1973). Money and Capital in Economic Development. Washington, D.C. Brookings Institution.
 
[19]  Mutinda, D. M. (2012). The Effect of Lending Interest Rate on Economic Growth in Kenya. Research Project, 1-45, retrieved from http://chss.uonbi.ac.ke/sites/default/files/chss/Musyoka%20Dan%20Project-2-1%20pdf.pdf.
 
[20]  Obamuyi, T. M. (2009). An investigation of the relationship between interest rates and economic growth in Nigeria, 1970 – 2006. Journal of Economics and International Finance. 1(4), 093-098.
 
[21]  Osterwald-Lenum, M. (1992). A Note with Quintiles of the Asymptotic Distribution of the Maximum Likelihood Co-integration Rank Test Statistic. Oxford Bulletin of Economics and Statistics, 54, 461-472.
 
[22]  Prakash, S. and Sharma, S. (2010). Impact of Inflation and Interest Rate on Growth of Indian Economy: A Study in Input- Output Framework. Conference paper, 20th IIOA conference in Bratislava, retrieved from https://www.iioa.org/conferences/20th/papers/files/975.pdf.
 
[23]  Pradana M., Bandula, J., Rathnayaka, M. and Rathnayake, K. T. (2013). Testing the Link between Inflation and Economic Growth: Evidence from Asia. Modern Economy, 4, 87-92.
 
[24]  Saymeh, A. A. F. and Orabi, M. M. A. (2013). The Effect of Interest Rate, Inflation Rate, GDP, on Real Economic Growth Rate in Jordan. Asian Economic and Financial Review, 3(3), 341-354.
 
[25]  Semuel, H. and Nurina, S. (2015). Analysis of the Effect of Inflation, Interest Rates, and Exchange Rates on Gross Domestic Product (GDP) in Indonesia. Proceedings of the International Conference on Global Business, Economics, Finance and Social Sciences (GB15_Thai Conference), Bangkok, Thailand, 20-22 February 2015 Paper ID: T507, 1-13.
 
[26]  Shaw, E (1973). Financial Deepening in Economic Development. Oxford University Press, New York.
 
[27]  Tanwar, R. (2014). Nexus between Inflation and Economic Development in India. International Journal of Humanities and Social Science Invention, 3(9), 63-67.
 
[28]  Udoka, C. O. and Roland, A. (2012). The Effect of Interest Rate Fluctuation on the Economic Growth of Nigeria, 1970-2010. International Journal of Business and Social Science, 3(20), 295-302.