The purpose of this article is to empirically examine the impact of FDI inflows on the rate of inflation in India. Therefore this article considers the relation between FDI and another important macroeconomic variable namely rate of inflation.
The inflow of foreign direct investment (FDI) in India has paved the path for the economical and financial development of a country. There has been significant increase in economic growth after the liberalization policies undertaken by India in 1991 (Nagaraj 1997).
Growth rate of India before the economic liberalisation was slow and was referred to as the “Hindu rate of growth”. With economic reforms in the 1990’s, the Indian economy not only allowed foreign investment but also shifted its approach from Socialist to Capitalist or market based approach. The growth rate has since accelerated, however India is way behind in terms of development index. Furthermore, climate change and environmental concerns have become a major concern for the world. As a result it will be a major challenge for India to balance between higher growth and the environment.