Dynamic Connectedness Among Oil Prices, Exchange Rate and Consumer Inflation: New Evidence from India

This article examines the role of crude prices in affecting India’s currency and consumer inflation, analysing both the connectedness in the short and long run. Using wavelet coherency and dynamic Johansen cointegration methodology, the research investigates the time-varying linkages of crude oil, with inflation and INR. The findings reveal that there is no significant co-movement in the short run, while a strong relationship emerges over the long term. Notably, the connectedness of crude oil and the currencies intensified during the COVID-19 crisis. The results reveal that rising crude prices significantly influence the Indian currency and inflation in the long run. The relationship is stronger in the case of oil and exchange rates, and the direction is dominated by oil in driving the inflation and Indian currency. To mitigate these effects, reducing oil dependency through alternatives such as electric vehicles and Compressed Natural Gas is essential. These insights have important policy implications for inflation targeting and monetary policy decisions, while also guiding managerial strategies for pricing products that rely on oil as a key input.