Abstract
The purpose of this study is to examine the long-run and short-run impact of crude oil price and exchange rate shocks on domestic inflation in India within the framework of the Autoregressive Distributed Lag (ARDL) model. The results show that the exchange rate and oil price shocks significantly influence domestic inflation during the study period (April 1994 to February 2018). Further, the breakpoint unit root test revealed the severe impact of the 2008 financial crisis on inflation in India. The findings show that any move to scale down fuel subsidies will escalate cost-push inflation severely, as the country is an energy-dependent economy. So, policymakers shall stabilise the impact of these shocks through suitable monetary policy actions.
Highlights
The exchange rate and oil price pass-through effect and its influence on economic activities, especially in developing economies, is always a nightmare for policymakers (Neely & Rapach, 2011)
The results of our study show a significant impact of exchange rate volatility and oil price fluctuation on Consumer Price Index (CPI) in India
The rapid development of EMEs boosted the demand for foreign exchange and crude oil in the global economy, which in turn influenced the price of these products
Summary
The exchange rate and oil price pass-through effect and its influence on economic activities, especially in developing economies, is always a nightmare for policymakers (Neely & Rapach, 2011). In energy-dependent economies, exchange rate and oil price shocks influence the economic growth and act as a vital cause of inflation, which destabilizes the monetary and financial system of the economy (McKillop, 2004; Mirdala, 2014). As petroleum products are vital input for the production process, any unfavourable movement in oil prices directly passed to the cost of petroleum products causes an increase in the cost of energy. This forces the industry to increase the price, reduce output, and investment. While researches like Rautava (2004) argue that it has both long-run as well as short-run effect
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