Abstract
The objective of this paper is to see the effects of change of fuel price on inflation and exchange rate in India using data from 2017 to 2019 i.e. the period in which the fuel oil price was expected to move up and down with the international price of the crude on a daily basis. Unit root test and co-integration test were done with the random data points. Granger causality & VECM model were employed to analyze the data. At the first difference, null hypothesis that a unit root is present had been rejected at 0.05 % level in all the three variables namely, fuel oil price, CPI (REER) and exchange rate (Rs. to $ US). In the co-integration test between fuel oil price & exchange rate, Trace test indicates 2 co-integrating eqn(s) at the 0.05 level and in CPI & exchange rate, Trace test indicates 1 co-integrating eqn(s) at the 0.05 level in the long run. But in the short run, only fuel price affected the inflation. For granger causality test, we found that the inflation does not granger cause to the fuel price and it also does not granger cause to the exchange rate. This implied that there are factors such as other macroeconomic interventions that affected the dependent variables in the period which is studied.
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