This study examines the relationship between monetary policy and inflation dynamics in India using a time series framework based on the Autoregressive Distributed Lag (ARDL) approach. Using monthly data for the period January 2000 to December 2023, the analysis investigates both the short-run and long-run effects of monetary policy, proxied by the policy rate, on inflation measured through the Consumer Price Index. The empirical findings reveal the existence of a stable long-run relationship between inflation, monetary policy, and key macroeconomic variables. In the long run, monetary policy is found to exert a significant negative effect on inflation, indicating its effectiveness in maintaining price stability.However, the short-run results suggest that the impact of policy changes is relatively weak and delayed, reflecting transmission lags and structural rigidities within the economy. The study further highlights the significant role of external and supply-side factors, particularly oil prices and exchange rate movements, in influencing inflation dynamics. These findings suggest that inflation in India is not purely demand-driven but is also shaped by global and cost-push factors, which limit the short-run effectiveness of conventional monetary policy. The stability tests confirm that the estimated relationships are robust over the sample period, reinforcing the reliability of the results.
Sonica Singhi (Thu,) studied this question.