Exploring the linkages between BSE Sensex, crude oil prices and exchange rates: the financial triad in India

Purpose The purpose of this study is to explore the linkages between the financial triad of BSE Sensex, crude oil prices and exchange rates in India using annual data. Design/methodology/approach The analysis uses annual data from 2000–2001 to 2021–2022, which are obtained from secondary sources. To investigate the financial interactions among these variables in India, the methodology uses the vector error correction model (VECM), the Granger causality test, the impulse response function (IRF) and variance decomposition, following Johansen cointegration. Findings Long-term relationships among variables are disclosed by the cointegration test. The BSE Sensex is significantly influenced by crude oil prices and exchange rates, as indicated by the VECM results. Conversely, the crude oil prices and exchange rates are primarily influenced by their own historical values. The Granger causality tests confirm these findings. Variance decomposition suggests that none of the variables are exogenous in the long term. The IRF results indicate that all variables initially respond positively to shocks from other variables, but these effects diminish over time. Originality/value This study established a short-term dynamic between crude oil prices, exchange rates and stock prices, which was previously not found. It also incorporates recent economic events, such as the COVID-19 pandemic and the Russia–Ukraine war, which were previously not included. These insights provide valuable guidance for policymakers and investors. They help in developing strategies to address vulnerabilities caused by external shocks. This reinforces the importance of the study. It also highlights its contribution to the financial domain.