Oil Price And Real Exchange Rate: The Case Of India

Abstract

This paper studies the effect of oil price change on the real exchange rate between the Indian rupee and the U.S. dollar.  For that, a model is developed which is based on a monetary model of exchange rate which incorporates the real GDP, real money balances, and the interest rates of both the home and foreign country and the real price of the crude oil.  Quarterly time series data from 1996 to 2012 is used.  Before estimating the model, the time series properties of the data are diagnosed in order to ensure the stationarity of the data.  The data series are found to be integrated of order one and the null hypothesis of no cointegration is rejected.  Therefore an error correction model is developed and estimated.  The estimated results suggest that there is no detectable effect of oil price change on the real exchange rate between the Indian rupee and the U.S. dollar.