Journal Press India^®

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This study investigates the impact of key macroeconomic variables—exchange rate, crude oil prices, and gross domestic product (GDP)—on the inflation rate in India over the period from 1987 to 2023, with a decade-long forecast to assess future trends. Employing the Vector Error Correction Model (VECM), the research identifies significant long-run and short-run relationships among these variables. The Johansen Cointegration Test confirms two long-run equilibrium relationships. Results from the VECM reveal that crude oil price shocks and exchange rate depreciation significantly drive inflation, reflecting India’s reliance on imported oil and vulnerability to currency fluctuations. In contrast, GDP exhibits a weaker direct influence on inflation in the short run, suggesting mediated effects through demand channels. Diagnostic tests validate the model’s robustness, despite moderate serial correlation, while impulse response functions underscore the pronounced effects of oil prices and exchange rates on inflation acceleration. The study offers a roadmap for navigating macroeconomic challenges.

Keywords

Inflation; Gross Domestic Product; Crude Oil price; Exchange rate; India

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