Abstract:
Financial development is considered an important driver of economic growth, but
high level of inflation impedes the ability of the financial sector to allocate resources
effectively. This paper examines the impact of inflation on financial development
in Indian economy for the period of 1970-2012. To test for stationarity, the study
uses Ng- Perron unit root tests. The long- and short-run dynamics are obtained
by using auto-regressive distributed lag (ARDL) approach to co-integration and
Granger causality is used to examine the direction of the causal link among the
variables. The empirical evidence indicates that there is a significant, and negative
relationship between inflation and both banking sector development indicator both
in the short and long run. The empirical findings reveal that high trends of inflation
impede the performance of financial markets. The degree of trade openness
promotes development of the financial sector.