Abstract
This study tried to empirically ascertain the interaction of oil prices (OPs) and macroeconomy by using monthly data from January 1991 to January 2020 in the Indian context. Empirical analysis has been carried out on two separate samples (first from January 1991 to June 2002 and second from July 2002 to January 2020) for accommodating changing macroeconomic context. Further, we also tested the suitability for symmetry/asymmetry in the relationship between OPs and macroeconomic variables. It is found that the oil macroeconomy linkage is well approximated by a linear measure. The structural vector auto-regression framework suggests that a positive oil shock during the early reform period causes a significant drop in output growth. There is an increase in inflation in response to a positive shock in OPs and the central bank pursued an expansionary monetary policy to boost investment and consumption. During the last two decades, the decline in output is less pronounced than the first sub-period, while the response of inflation is sharp and significant and lasts for around six months. During recent times, the inflationary effect of oil shocks is a cause of concern and the central bank needs to respond more actively in the future for minimising its effect.
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