Short Term Nominal Interest Rate as a Predictor of Expected Inflation: Evidence from South Asian Countries

This research paper investigates the relationship between inflation and short-term interest rates for South Asian region and individual countries in South Asia. The study uses annual data for all South Asian countries from the period 2005 – 2015. A balanced panel data analysis is done to examine the relationship in South Asia. Major macroeconomic variables that have been selected through literature analysis are inflation rate, interest rate, money supply, real GDP, exchange rate, employment rate and imports where the inflation rate is the dependent variable. According to the results, treasury bill rate which represents the nominal interest rate is significant at 1% level of significance in South Asia with a negative relationship. With special focus to country level analysis, Bangladesh, Bhutan and Sri Lanka’s interest rates positively correlate to respective countries’ inflation rates while India, Nepal and Pakistan’s interest rates negatively correlate to inflation rates in respective countries. Hence, we can conclude that there are country wise differences in predicting inflation for South Asian countries.