Crude Oil Price, Exchange Rate and Emerging Stock Market: Evidence from India

ABSTRACT Oil is one of the most important forms of energy and is a significant determinant of global economic performance. Commodities like oil are fairly homogeneous and internationally traded. The impact of dollar nominated oil prices on stock prices may not be quite relevant for Indian context. In this context, the study of crude oil prices in dollar terms along with the exchange rate would be more meaningful to understand the impact of oil prices on stock market. The study investigates the dynamic relationships between oil price, exchange rate and Indian stock market during 1993 to 2013. The estimated results of the Johansen’s cointegration test and vector error correction model suggest that there exist a long run cointegrating relationships between crude oil price and Indian stock indices, but it cannot be said with sufficient confidence that the direction of the relation in the long run is from the oil price to the Sensex. The Granger causality test also reveals that the volatility of stock prices in India can be explained to cause the movement of oil price and exchange rate in short run. The observed relationship between oil price and stock indices is not due to the effect of the exchange rate fluctuations, because the change in exchange rate has no significant impact on oil prices or stock prices in India during the study period. The variance decomposition analysis reveals that the Indian stock prices are strongly exogenous in the sense that the crude oil price or exchange rate explains only a very small portion of the forecast variance error of the market index. Finally, from the impulse response functions analysis it is noticed that a positive shock in one variable have a persistent and prolonged effect on other variables. Keywords: Crude oil price; exchange rate; stock market; cointegration; granger causality test ABSTRAK Petroleum adalah salah satu bentuk tenaga yang penting dan menjadi satu faktor yang mempengaruhi prestasi ekonomi global. Komoditi seperti petroleum adalah homogen dan didagangkan di peringkat antarabangsa. Impak harga petroleum dalam dolar ke atas harga saham mungkin tidak relevan di India. Namun kajian berkaitan harga petroleum dalam nilai dolar selaras dengan kadar tukaran lebih memberi makna untuk memahami kesan harga petroleum ke atas pasaran saham. Kajian ini mengkaji hubungan dinamik di antara harga petroleum, kadar tukaran dan pasaran saham di India pada tahun 1993 hingga 2013. Keputusan ujian ko-integrasi Johansen dan model pembetulan ralat vektor menunjukkan bahawa wujudnya hubungan kointegrasi jangka panjang antara harga petroleum mentah dan indeks saham India. Namun, kajian ini tidak boleh menyatakan dengan keyakinan wajar bahawa arah hubungan jangka panjang adalah berpunca daripada harga petroleum kepada Sensex. Ujian Kausaliti Granger turut menunjukkan bahawa ketaktentuan harga saham India boleh diterangkan oleh pergerakkan harga petroleum dan kadar tukaran jangka pendek. Hubungan yang dikenalpasti antara harga petroleum dan indeks pasaran saham bukanlah disebabkan turun naik kadar tukaran kerana perubahan dalam kadar tukaran tidak memberikan kesan signifikan ke atas harga petroleum atau pasaran saham India sepanjang tenpoh kajian. Analisis penguraian varians menunjukkan harga saham India adalah sangat eksogen di mana harga petroleum mentah atau kadar tukaran menerangkan sebahagian kecil ralat varians jangkaan indeks pasaran. Akhir sekali, daripada analisis fungsi tindakbalas impuls didapati kejutan positif dalam satu variabel memberi kesan yang lama dan berterusan ke atas variabel lain. Kata kunci: Harga petroleum mentah; kadar tukaran; pasaran saham; kointegrasi; ujian kausaliti Granger