The Dynamics and Determinant of Money Demand in India: An Econometric Analysis

The present study tries to examine the key factors that determine money demand in India over the period from 1996 to 2020. The Auto-Regressive Distributed Lag model is applied to capture both short-run and long-run dynamics. The long run results show that income, interest rate, and foreign exchange reserves have a significant impact on money demand, while the exchange rate appears statistically insignificant. The error correction term indicates that short-run disequilibrium adjusts toward equilibrium at a rate of 32 percent annually. Overall, the findings show the importance of broad money (M3) as a useful indicator to assess output gaps and inflation expectations, and highlight its role in the formulation of India’s inflation-targeted monetary policy.