IMPACT OF CRUDE OIL PRICES ON EXCHANGE RATE AND INDIAN ECONOMY

MENTOR: DR. VIPUL SHARMA

BY: RAHUL KUMAR SAP ID:500014735

OUTLINE
OBJECTIVE LITERATURE REVIEW METHODOLOGY CRUDE OIL DYNAMICS IN INDIA OVERVIEW OF EXCHANGE RATE ANALYSIS FINDINGS AND CONCLUSION
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OBJECTIVE
Impact of Crude oil Prices on Trade deficit Effect of Crude oil Prices on Exchange rate To Study the Relationship between oil prices and Inflation Impact of Crude oil Prices on Indian GDP

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LITERATURE REVIEW
Robert A. Amano and Simon van Norden Exchange rate and oil prices Abeysinghe Estimation of direct and indirect impact of oil price on growth Hamilton Crude Oil and the Macro economy
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METHODELOGY
The linear regression model was selected to inspect the casual relationship between oil price volatility, Inflation, GDP, , Exchange rate, trade deficit of Indian economy. For relation of exchange rate and oil price data was converted into natural log to establish the monthly percentage change.

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DATA COLLECTION
OIL PRICES (Indian Oil Corporation Limited) WPI (Office of the Economic Adviser) EXCHANGE RATE(Pacific Exchange Rate Service) IMPORT/EXPORT(Ministry of commerce) GDP(Reserve Bank of India)

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INFORMATION ON THE DATA

For relation of oil price and exchange rate data was converted into natural log to determine the monthly percentage change. Monthly percentage change was calculated as follows LOG CRUDE OIL = LN (CRUDE OILT/CRUDE OILT-1) LOG USD/INR = LN (USD/INRT/USD/INRT-1) The % changes in GDP were calculated as follow: %GDP = (GDPT - GDPT-1)/ (GDPT) x 100

The % change in oil prices was calculated

This was done by: % Oil Price (P) = (PT - PT-1)/ (PT) x 100
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CRUDE OIL DYNAMICS IN INDIA

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REAL AND NOMINAL CRUDE PRICES

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EXCHANGE RATE
Exchange rate is the rate at which one currency trades against another in foreign exchange market. Factor affecting exchange rate: International trade Inflation Government polices FII,FDI Strength of the Economy
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DIRECT AND INDIRECT QUOTE

A direct quote is a home currency price of a unit of foreign currency An indirect quote is a foreign currency price of a unit of foreign currency Rs 45.5/$ is a direct quote in India and indirect quote in USA.

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CRUDE OIL IMPORT

11% 34% 18% 5% 10% 22% Iran Western Hemisphere Saudi Arabia Africa Other Other Middle East

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PRICE TREND

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FACTOR AFFECTING CRUDE OIL PRICES

World oil demand World oil supply Weather conditions Government policy Political Conditions Futures Market

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IMPACT OF CRUDE PRICE ON GLOBAL ECONOMY

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IMPACT OF INCRESE IN OIL PRICES ON GROWTH AND INFLATION LEVELS IN WORLDWIDE

*source: goldmansacs
International oil prices per barrel ($) Increase in international oil prices (%) Extent of fall in manufacturing sector growth (%) 2.1 Extent of fall in GDP growth (%) Extent of increase in WPI (%)

50

38.9

0.4

1.5

60

66.7

9.7

1.9

3.6

70

94.2

16.9

3.4

5.7

80

122.2

24.5

4.9

7.9

140

126.1

29.7

7.3

7.2

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ANALYSIS
Theoretical Analysis

Oil Price and Inflation

Oil Price and Trade deficit Oil Price and GDP Oil Price and Exchange rate
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THEOTERICAL MODEL

S USD

EXCHAN GE RATE(INR /USD)

ER02
ER01

DUSD02
DUSD01 Qty01
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Qty02

Quantity of USD
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THEOTERICAL MODEL ANALYSIS

When the price of oil is increases, more US Dollar is demanded by Indian Economy in order to pay import bill. The relation is shown in figure; there is a rightward shift from DUSD to DUSD1. Thus it raises the exchange rate INR to INR .This whole figure represent a deprecation of Indian currency. Thus proving my hypothesis is that as the price of oil will increase, the Indian currency will depreciate.
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IMPACT OF CRUDE OIL IMPORT ON TRADE DEFECIT

In Rs. Crore

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12*

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Crude TOTAL Oil Value IMPORT 117003 171702 219029 272699 348304 375277 455276 672220

501065 660409 840506 1012312 1374436 1363704 1683467 2342217

CRUDE OIL % OF TOTAL IMPORT 23.35086 25.99934 26.05918 26.93822 25.34159 27.51895 27.04395 28.70016

Total C.oil % of TRADE Export total export DEFICIT 375340 31.1725369 125725 456418 37.61946286 203991 571779 38.30658349 268727 655864 41.57855897 356448 840755 41.42752645 533681 845534 44.38343106 518170 1142922 39.8343894 540545 1224883 54.88034367 1117334
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ANALYSIS SUMMARY
Descriptive Statistics
LOG CRUDE OIL Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum Maximum Sum Count
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LOG (USD/NGN) 0.006066543 0.009931473 0.020977923 #N/A 0.089383256 0.007989367 3.53368503 -1.544008367 0.512307284 -0.33690617 0.175401114 0.491389984 81 Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum Maximum Sum Count 0.002346853 0.00246335 -0.000761518 #N/A 0.022170147 0.000491515 0.430681522 0.557762885 0.106154752 -0.042837089 0.063317662 0.190095055 81
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ANALYSIS
In the descriptive statistics table above which shows the distinctiveness of the full sample data set, we see the mean of both the returns on crude oil and USD/INR exchange rate are both positive, this indicate we have more of increase than decrease in the changes in both of the variables. The standard deviation of the crude oil is much higher than that of the exchange rate which indicates that more degree of variability of crude oil as compared with exchange rate which means the dispersion the data points of the exchange is closer to its mean.

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ANALYSIS (CONTD.)
The returns of the crude oil is negatively skewed which indicate that the majority of the allocation is concentrated to the right, which means low values in the sharing are comparatively few, whereas exchange rate is positively skewed which indicates that the greater part of the allocation will be to the left, and the higher values in this allocation are relatively few.
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The returns on Crude oil have a higher kurtosis as compared with exchange rate which indicates there is more crude oil variance might be as a result of uncommon soaring deviations.

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OIL PRICE AND INFLATION

It has been seen that rising oil prices has a negative effect on inflation but it depend that whether economy is developed as USA or developing as India and oil importing(USA, China, India) or oil exporting(Saudi Arabia, Russia, Iran).

Nevertheless there are also extra factors also to judge, such as assured event which show the way to increase in Inflation. Consequently oil price may not affect Inflation at all.
Data include WPI and crude oil price from January 2011 to December 2013.
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GRAPH
400 350

300

250

200

CRUDE PRICE CRUDE INFLATION

150

100

50

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

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CRUDE OIL V/S ALL COMMODITY

CRUDE CRUDE PRICE INFLATION CRUDE PRICE 1 CRUDE INFLATIO N 0.4879
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CRUDE INFLATION PRICE INFLATION 1 CRUDE PRICE 0.085025308 1

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OIL PRICE AND INFLATION(CONTD..)

The correlation between crude oil price and inflation is 0.08. The sign of coefficient of correlation shows there is a positive correlation between crude oil price and inflation. In other word both the variable moves in same direction. The value of coefficient of correlation indicates that when the crude oil prices increases, 8.5 of the time WPI also increases and vice versa.

Visual inspection of the data suggests that WPI increases as the price of crude oil increase.
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REGRESSION ANAYSIS
The question now is how to formalize the relationship in Quantitative manner. We can do through regression. Let assume that there is a linear relationship between crude oil price and WPI. We can express the linear relationship mathematically as : Y = + x Y = dependent variable, X = independent variable = Y Intercept = Slope coefficient The above equation relates inflation and crude oil price which precisely says that inflation can be explained by crude oil prices. In other words variation in inflation can be explained by variation in crude oil prices. But Crude oil price is not the only factor which affects the Inflation. There is numerous other factor such as money supply, interest rate etc affecting inflation. To account all these error we include an error term in the regression model.
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REGRESSION ANALYSIS(CONTD)
For the regression model I use inflation(WPI Data) as a dependent variable and crude oil price as an independent variable. The final model will be Inflation Y= + crude oil price + e Y = Dependent variable (Inflation) X = Independent variable (crude price) = Estimated Y intercept = Estimated slope coefficient e = error term
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REGRESSION ANALYSIS(CONTD)
SUMMARY OUTPUT Regression Statistics Multiple R 0.08502531 R Square 0.0072293 Adjusted R Square -0.0378966 Standard Error 7.00420934 Observations 24 ANOVA df Regression Residual Total 1 22 23 SS MS F Significance F 7.859382005 7.859382 0.160203 0.69283 1079.296868 49.05895 1087.15625

Intercept CRUDE PRICE

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Coefficients Standard Error t Stat P-value Lower 95%Upper 95% Lower 95.0% Upper 95.0% 149.833471 23.28927094 6.433584 1.79E-06 101.5345 198.1325 101.5345 198.1325 0.0853659 0.213279604 0.400253 0.69283 -0.35695 0.527681 -0.35695 0.527681
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REGRESSION ANALYSIS(CONTD)
Y=+x = 149.83 + 0.08 X According To estimated regression equation, for every 1 % increase in crude oil price inflation will increase by .08 percentage point. The value of is 149.83. This shows that when price of crude oil is zero, the level of inflation will be 149.83. R Square is 0.07, which means that independent variable X explains .7 % in total variation in dependent variable Y. The calculated T value is less than the critical value at 5 % significance level. Null hypothesis is not rejected and conclude that there is negative association between WPI and crude oil price.
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OIL AND GDP

SUMMARY OUTPUT Regression Statistics Multiple R 0.21164 R Square 0.044792 Adjusted R Square 0.024468 Standard Error 8.571662 Observations 49 ANOVA df Regression Residual Total SS MS F Significance F 1 161.9296 161.9296 2.203921 0.144337 47 3453.249 73.47338 48 3615.178

Coefficients Standard Error t Stat P-value Lower 95%Upper 95% Lower 95.0% Upper 95.0% Intercept 2.792775 1.225064 2.279696 0.027208 0.328263 5.257286 0.328263 5.257286 4/23/2013 University of Petroleum and Energy Studies 32 OIL -0.09622 0.064817 -1.48456 0.144337 -0.22662 0.03417 -0.22662 0.03417

REGRESSION ANALYSIS
From the OLS estimation above Y = 2.79 0.011 This shows that a 1 % increase in oil prices causes a 1 % decrease in GDP, Which is consistent against the economic theory. However there was a weak relation of 0.04 and -value too rejected at the 5 % confidence/significance level. So a log model also needs to be investigating the price of oil impact. Analyzing on the log Forms WTI and GDP were converted into log forms. According to regression from the log forms, the relationship is positive. 1% increase in oil price increase GDP BY 11%. This is not reliable with the economic assumption due to other factor..

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OIL AND EXCHANGE RATE

2006-13 CRUDE PRICE (USD/INR) LOG (USD/INR) LOG CRUDE OIL 2011-13 CRUDE PRICE (USD/INR) LOG (USD/INR) LOG CRUDE OIL 2006-11 CRUDE PRICE (USD/INR) LOG (USD/INR) LOG CRUDE OIL
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CRUDE PRICE 1 0.152904352 0.216394996 0.150502563 CRUDE PRICE 1 -0.39835814 -0.24561444 0.486602685 CRUDE PRICE 1 0.226405507 -0.50917198 0.210019475

(USD/INR) 1 0.197115542 -0.182441037 (USD/INR) 1 0.05882618 -0.079362396 (USD/INR) 1 -0.2452431 -0.389621261

LOG (USD/INR) LOG CRUDE OIL

1 -0.395081233

LOG (USD/INR) LOG CRUDE OIL

1 -0.518021021

LOG (USD/INR) LOG CRUDE OIL

1 0.150359132
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REGRESSION ANALYSIS
SUMMARY Regression Multiple R 0.39836 R Square 0.15869 Adjusted R Square 0.11662 Standard Error 3.82044 Observat ions 22 ANOVA df Regressi on 1 Residual 20 Total 21 Coeffici ents Intercept 80.1856 CRUDE PRICE -0.267 SS 55.0613 291.915 346.976 Standar d Error 15.1364 0.13746 MS 55.0613 14.5957 F 3.77243 Significa nce F 0.06632

t Stat 5.29752 -1.9423

P-value

Lower 95%

Upper 95% 111.76 0.01975

Lower 95.0% 48.6116 -0.5537

Upper 95.0% 111.76 0.01975

3.48E-05 48.6116 0.06632 -0.5537

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ANALYSIS
Important point is R2. It is the square of the sample correlation coefficient between the variable which are dependent. Here R square is 0.15, meaning that 15 % of the variation in the USD-INR is explained by the variation in oil prices. Weve anticipated the following linear connection between the price of oil and exchange rate. y = 0.80 0.26 x Exchange rate is taken on y axis and prices of oil are on the x axis, which will gives us the correlation: Exchange Rate = 0.80 -0.26 Oil Prices We can infer numerical figures as follows: -0.26 indicates the correlation between changes in exchange rate and changes in the oil price which represent that at whatever time oil prices go up by a dollar, the Indian rupee loose 26 paisa on the U.S. one.
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CONCLUSION
Oil prices go up by a dollar, the Indian rupee loose 26 paisa on the U.S. one. 1% increase in oil price decreases GDP BY 1.1% of India. 1 % increase in crude oil price inflation will increase by .08 point. The standard deviation of the crude oil is much higher than that of the exchange rate which indicates that more degree of variability of crude oil as compared with exchange rate Increase in crude oil prices widens trade deficit gap.
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REFERENCE

American essay. (2013, march). Retrieved fr0m http://www.americanessays.c0m/study-aids/freeessays/ec0n0mics/0il-price-fluctuati0ns.php kaur, M. (2013). slide share. Retrieved fr0m http://www.slideshare.net/rahulraj543/crude0ild0llarg0ld-prices MINISTRY 0F PETR0LEUM & NATURAL GAS. (2011-12). Retrieved january 2013, fr0m http://www.data.g0v.in/dataset/trends-indian-petr0leum-industry-glance-2004-12 Mussa, M. (Dec 8 2000). The Impact 0f Higher 0il Prices 0n the Gl0bal Ec0n0my. IEA. Nk0m0, J. Crude 0il price m0vements and their impact. Cape t0wn: Energy Research Centre, University 0f Cape T0wn. 0ffice 0f the Ec0n0mic Adviser. (2011-12, JANUARY-DECEMBER). Retrieved fr0m Eaiindustry: http://www.eaindustry.nic.in/ PR0DUCT. (2004-13, april). (I0CL) Retrieved JANUARY 2013, fr0m I0CL WEBSITE: http://www.i0cl.c0m/Pr0ducts/Crude0ilPrices.aspx Salim*, R. The impact 0f Crude 0ilprice v0latility 0n selected Asian emerging ec0n0mies. Bangladesg: Curtin Business sch00l. SWADIMATH*, U. C., ANILKUMAR**, D. K., & J0SHI***, P. B. (January 2013,). RISE & IMPACT 0F CRUDE 0IL PRICE IN INDIA. Mys0re: Internati0nal J0urnal 0f Marketing, Financial Services & Management Research. Wils0n, A. 0. (2011). Exchange rate v0latility: an analysis 0f the relati0nship between the Nigerian naira, 0il prices, and US d0llar. G0tland university, Master Thesis in Business Administrati0n 15 ECTS.

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THANK YOU!!
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