Effects of Crude Oil Prices on Indian Financial Sector

Abstract

The oil price in the international market has witnessed significant fluctuations in the recent years and such fluctuations tend to have ramifications on the economy as a whole. Hence, it is crucial for the policy makers to identify the spillover implications of oil price volatility on the stability of various segments of domestic markets. In this regard, this paper makes an attempt to model such volatility spillover from oil price to select variables such as inflation, index of industrial production, exchange rate and stock returns by employing BEKK model - a widely used version of bivariate GARCH model. The empirical evidence suggests that fluctuations in oil prices in the international market seem to have significantly triggered the volatility in the Indian financial and real sectors.