Causal Analysis of Oil Prices and Macroeconomic Performance: Evidence from India

Abstract

The oil price affects every corner of economic activity throughout the world. Economies of all oil-producing and oil-consuming countries are considerably influenced by the volatility in the crude oil prices in the international market. Although a number of studies have investigated on the causation of oil prices on macroeconomic determinants, but in the context of India, not many studies can be traced in the literature, despite the fact that India ranks among the top 10 largest oil-consuming countries. The goal of the article is to shed light on the impact of volatility in international crude oil prices on macroeconomic indicators of Indian economy. For the purpose of this study, West Texas Intermediate Crude Oil Prices are taken as the benchmark, that is, independent variable. The set of dependent variables include selected macroeconomic indicators, that is, balances of payments, inflation, exchange rate, index of industrial production, stock market returns, etc. The empirical analysis that covers data series of 10 financial years from April 2000 to March 2010 is done by using Unit Root Test and Granger Causality Test in Vector Autoregressive (VAR) framework. The findings of the study indicate that inflation in India has bidirectional causal relationship with international crude oil prices.