Dynamics of Exchange Rate and Crude Oil Price- Evidence from India

Abstract

Determining country's currency value and predicting its volatility in international market is very complicated yet most focused and important aspect of country's growth at international level. Currency value, to be precise, exchange rate is an important indicator of relative economic wealth of a country. Exchange rate is influenced by a large number of economic variables including stock prices, interest rates, inflation rate, IIP, oil prices, gold prices and many more. The objective of this paper is to study the relationship between international oil prices and real exchange rate for India.The monthly data for oil prices and nominal exchange rate has been obtained for period January 2001 to September 2013. The data has been processed using regression technique and excel has been used for analysis and charting purpose. The hypothesis has been tested by using F- statistics and applying statistical formulae. The results obtained showed that there exist a relationship between oil prices and real exchange rate for India. The result reveals a negative relation between oil prices and real effective exchange rate. Hence, as oil prices go up, Indian rupee will depreciate against US dollar in real terms which in turn implies a rise in nominal exchange rate. As oil prices rise, India being an importing nation of crude oil results into shift of its wealth to exporting nation thereby putting downward pressure on rupee worth in international market.