“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
University of Petroleum and Energy Studies 2

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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

4/23/2013

University of Petroleum and Energy Studies

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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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trade deficit of Indian economy. Exchange rate.METHODELOGY The linear regression model was selected to inspect the casual relationship between oil price volatility. 4/23/2013 University of Petroleum and Energy Studies 5 . GDP. For relation of exchange rate and oil price data was converted into natural log to establish the monthly percentage change. Inflation. .

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) 4/23/2013 University of Petroleum and Energy Studies 6 .

INFORMATION ON THE DATA For relation of oil price and exchange rate data was converted into natural log to determine the monthly percentage change.GDPT-1)/ (GDPT) x 100 The % change in oil prices was calculated This was done by: % Oil Price (P) = (PT . 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 .PT-1)/ (PT) x 100 4/23/2013 University of Petroleum and Energy Studies 7 .

CRUDE OIL DYNAMICS IN INDIA 4/23/2013 University of Petroleum and Energy Studies 8 .

REAL AND NOMINAL CRUDE PRICES 4/23/2013 University of Petroleum and Energy Studies 9 .

Factor affecting exchange rate: International trade Inflation Government polices FII.FDI Strength of the Economy University of Petroleum and Energy Studies 10 • • • • • 4/23/2013 .EXCHANGE RATE Exchange rate is the rate at which one currency trades against another in foreign exchange market.

4/23/2013 University of Petroleum and Energy Studies 11 .5/$” is a direct quote in India and indirect quote in USA.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.

CRUDE OIL IMPORT 11% 34% 18% 5% 10% 22% Iran Western Hemisphere Saudi Arabia Africa Other Other Middle East 4/23/2013 University of Petroleum and Energy Studies 12 .

PRICE TREND 4/23/2013 University of Petroleum and Energy Studies 13 .

FACTOR AFFECTING CRUDE OIL PRICES • • • • • • World oil demand World oil supply Weather conditions Government policy Political Conditions Futures Market 4/23/2013 University of Petroleum and Energy Studies 14 .

IMPACT OF CRUDE PRICE ON GLOBAL ECONOMY 4/23/2013 University of Petroleum and Energy Studies 15 .

9 0.9 140 126.7 9.6 70 94.7 1.1 29.5 60 66.7 7.2 24.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 (%) 2.9 7.1 Extent of fall in GDP growth (%) Extent of increase in WPI (%) 50 38.4 1.7 80 122.2 4/23/2013 University of Petroleum and Energy Studies 16 .9 3.4 5.9 3.3 7.5 4.2 16.

ANALYSIS Theoretical Analysis Oil Price and Inflation Oil Price and Trade deficit Oil Price and GDP Oil Price and Exchange rate 4/23/2013 University of Petroleum and Energy Studies 17 .

THEOTERICAL MODEL S USD EXCHAN GE RATE(INR /USD) ER02 ER01 DUSD02 DUSD01 Qty01 4/23/2013 Qty02 Quantity of USD 18 University of Petroleum and Energy Studies .

there is a rightward shift from DUSD to DUSD1.THEOTERICAL MODEL ANALYSIS • When the price of oil is increases. Thus it raises the exchange rate INR to INR . Thus proving my hypothesis is that as the price of oil will increase. more US Dollar is demanded by Indian Economy in order to pay import bill.This whole figure represent a deprecation of Indian currency. the Indian currency will depreciate. The relation is shown in figure. 4/23/2013 University of Petroleum and Energy Studies 19 .

8343894 540545 1224883 54.05918 26.61946286 203991 571779 38.1725369 125725 456418 37.99934 26.34159 27.57855897 356448 840755 41. Crore Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12* 4/23/2013 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 23.51895 27.88034367 1117334 20 University of Petroleum and Energy Studies .70016 Total C.93822 25.04395 28.35086 25.42752645 533681 845534 44.oil % of TRADE Export total export DEFICIT 375340 31.30658349 268727 655864 41.38343106 518170 1142922 39.IMPACT OF CRUDE OIL IMPORT ON TRADE DEFECIT In Rs.

430681522 0.491389984 81 Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum Maximum Sum Count 0.557762885 0.000491515 0.002346853 0.089383256 0.00246335 -0.175401114 0.009931473 0.106154752 -0.063317662 0.ANALYSIS SUMMARY Descriptive Statistics LOG CRUDE OIL Mean Standard Error Median Mode Standard Deviation Sample Variance Kurtosis Skewness Range Minimum Maximum Sum Count 4/23/2013 LOG (USD/NGN) 0.042837089 0.33690617 0.007989367 3.512307284 -0.006066543 0.544008367 0.020977923 #N/A 0.53368503 -1.000761518 #N/A 0.022170147 0.190095055 81 21 University of Petroleum and Energy Studies .

we see the mean of both the returns on crude oil and USD/INR exchange rate are both positive. 4/23/2013 University of Petroleum and Energy Studies 22 . 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.ANALYSIS • In the descriptive statistics table above which shows the distinctiveness of the full sample data set.

) • The returns of the crude oil is negatively skewed which indicate that the majority of the allocation is concentrated to the right. University of Petroleum and Energy Studies 23 . which means low values in the sharing are comparatively few. 4/23/2013 • 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. and the higher values in this allocation are relatively few. whereas exchange rate is positively skewed which indicates that the greater part of the allocation will be to the left.ANALYSIS (CONTD….

China. Russia. India) or oil exporting(Saudi Arabia. Iran). 4/23/2013 University of Petroleum and Energy Studies 24 .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. • Data include WPI and crude oil price from January 2011 to December 2013. • Nevertheless there are also extra factors also to judge. Consequently oil price may not affect Inflation at all. such as assured event which show the way to increase in Inflation.

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 4/23/2013 University of Petroleum and Energy Studies 25 .

4879 4/23/2013 CRUDE INFLATION PRICE INFLATION 1 CRUDE PRICE 0.085025308 1 26 1 University of Petroleum and Energy Studies .CRUDE OIL V/S ALL COMMODITY CRUDE CRUDE PRICE INFLATION CRUDE PRICE 1 CRUDE INFLATIO N 0.

In other word both the variable moves in same direction. 8. 4/23/2013 University of Petroleum and Energy Studies 27 .) • The correlation between crude oil price and inflation is 0. The value of coefficient of correlation indicates that when the crude oil prices increases.08.5 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. The sign of coefficient of correlation shows there is a positive correlation between crude oil price and inflation..OIL PRICE AND INFLATION(CONTD.

REGRESSION ANAYSIS • The question now is how to formalize the relationship in Quantitative manner. In other words variation in inflation can be explained by variation in crude oil prices. There is numerous other factor such as money supply. X = independent variable α = Y Intercept β = Slope coefficient • The above equation relates inflation and crude oil price which precisely says that inflation can be explained by crude oil prices. We can do through regression. But Crude oil price is not the only factor which affects the Inflation. To account all these error we include an error term in the regression model. Let assume that there is a linear relationship between crude oil price and WPI. 4/23/2013 University of Petroleum and Energy Studies 28 . We can express the linear relationship mathematically as : Y = α + β x Y = dependent variable. interest rate etc affecting inflation.

The final model will be Inflation Y= α + crude oil price β + e Y = Dependent variable (Inflation) X = Independent variable (crude price) α = Estimated Y intercept β = Estimated slope coefficient e = error term 4/23/2013 University of Petroleum and Energy Studies 29 .REGRESSION ANALYSIS(CONTD…) • For the regression model I use inflation(WPI Data) as a dependent variable and crude oil price as an independent variable.

05895 1087.08502531 R Square 0.5345 198.0072293 Adjusted R Square -0.213279604 0.35695 0.0% Upper 95.35695 0.1325 101.0853659 0.REGRESSION ANALYSIS(CONTD…) SUMMARY OUTPUT Regression Statistics Multiple R 0.69283 1079.296868 49.400253 0.527681 University of Petroleum and Energy Studies 30 .527681 -0.859382005 7.5345 198.859382 0.160203 0.79E-06 101.00420934 Observations 24 ANOVA df Regression Residual Total 1 22 23 SS MS F Significance F 7.69283 -0.1325 0.0378966 Standard Error 7.433584 1.0% 149.15625 Intercept CRUDE PRICE 4/23/2013 Coefficients Standard Error t Stat P-value Lower 95%Upper 95% Lower 95.28927094 6.833471 23.

83.83.07.7 % in total variation in dependent variable Y. for every 1 % increase in crude oil price inflation will increase by . 4/23/2013 University of Petroleum and Energy Studies 31 . Null hypothesis is not rejected and conclude that there is negative association between WPI and crude oil price. • The value of α is 149.08 X • According To estimated regression equation. • R Square is 0. which means that independent variable X explains .REGRESSION ANALYSIS(CONTD…) • Y=α+βx = 149. the level of inflation will be 149. This shows that when price of crude oil is zero.83 + 0.08 percentage point. • The calculated T value is less than the critical value at 5 % significance level.

48456 0.22662 0.225064 2.144337 -0.279696 0.22662 0.064817 -1.024468 Standard Error 8.0% Intercept 2.144337 47 3453.178 Coefficients Standard Error t Stat P-value Lower 95%Upper 95% Lower 95.249 73.03417 -0.47338 48 3615.21164 R Square 0.03417 .203921 0.328263 5.9296 161.257286 4/23/2013 University of Petroleum and Energy Studies 32 OIL -0.792775 1.257286 0.0% Upper 95.027208 0.044792 Adjusted R Square 0.571662 Observations 49 ANOVA df Regression Residual Total SS MS F Significance F 1 161.09622 0.OIL AND GDP SUMMARY OUTPUT Regression Statistics Multiple R 0.328263 5.9296 2.

011 This shows that a 1 % increase in oil prices causes a 1 % decrease in GDP.79 – 0. So a log model also needs to be investigating the price of oil impact.. According to regression from the log forms. Which is consistent against the economic theory.04 and β-value too rejected at the 5 % confidence/significance level.REGRESSION ANALYSIS • From the OLS estimation above Y = 2. 1% increase in oil price increase GDP BY 11%. the relationship is positive. Analyzing on the log Forms WTI and GDP were converted into log forms. However there was a weak relation of 0. 4/23/2013 University of Petroleum and Energy Studies 33 . This is not reliable with the economic assumption due to other factor.

50917198 0.216394996 0.389621261 LOG (USD/INR) LOG CRUDE OIL 1 -0.150502563 CRUDE PRICE 1 -0.24561444 0.2452431 -0.518021021 1 LOG (USD/INR) LOG CRUDE OIL 1 0.226405507 -0.197115542 -0.395081233 1 LOG (USD/INR) LOG CRUDE OIL 1 -0.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 4/23/2013 CRUDE PRICE 1 0.486602685 CRUDE PRICE 1 0.079362396 (USD/INR) 1 -0.210019475 (USD/INR) 1 0.39835814 -0.05882618 -0.152904352 0.182441037 (USD/INR) 1 0.150359132 34 1 University of Petroleum and Energy Studies .

01975 3.06632 -0.48E-05 48.915 346.82044 Observat ions 22 ANOVA df Regressi on 1 Residual 20 Total 21 Coeffici ents Intercept 80.6116 0.267 SS 55.5537 Upper 95.1364 0.REGRESSION ANALYSIS SUMMARY Regression Multiple R 0.39836 R Square 0.76 0.76 0.976 Standar d Error 15.13746 MS 55.0613 291.0% 48.0% 111.9423 P-value Lower 95% Upper 95% 111.77243 Significa nce F 0.5957 F 3.5537 4/23/2013 University of Petroleum and Energy Studies 35 .11662 Standard Error 3.0613 14.6116 -0.06632 t Stat 5.1856 CRUDE PRICE -0.01975 Lower 95.29752 -1.15869 Adjusted R Square 0.

4/23/2013 University of Petroleum and Energy Studies 36 . Here R square is 0. one.ANALYSIS • Important point is R2. which will gives us the correlation: Exchange Rate = 0. It is the square of the sample correlation coefficient between the variable which are dependent. meaning that 15 % of the variation in the USD-INR is explained by the variation in oil prices. the Indian rupee loose 26 paisa on the U.26 Oil Prices We can infer numerical figures as follows: -0.80 -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.S.80 – 0.15. We’ve anticipated the following linear connection between the price of oil and exchange rate.26 x Exchange rate is taken on y axis and prices of oil are on the x axis. y = 0.

08 point. the Indian rupee loose 26 paisa on the U.CONCLUSION • Oil prices go up by a dollar. • 1% increase in oil price decreases GDP BY 1.S. • 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.1% of India. • 1 % increase in crude oil price inflation will increase by . one. 4/23/2013 University of Petroleum and Energy Studies 37 .

americanessays.in/dataset/trends-indian-petr0leum-industry-glance-2004-12 Mussa.REFERENCE • • • • • • • • • • American essay. ANILKUMAR**. Wils0n. University 0f Cape T0wn. The impact 0f Crude 0ilprice v0latility 0n selected Asian emerging ec0n0mies.in/ PR0DUCT. 0ffice 0f the Ec0n0mic Adviser.nic. K. G0tland university. C. (2011-12).i0cl. Bangladesg: Curtin Business sch00l.slideshare.aspx Salim*. fr0m http://www. Nk0m0. SWADIMATH*. U.eaindustry.net/rahulraj543/crude0ild0llarg0ld-prices MINISTRY 0F PETR0LEUM & NATURAL GAS. 0. Crude 0il price m0vements and their impact.c0m/study-aids/freeessays/ec0n0mics/0il-price-fluctuati0ns.php kaur. (2004-13. march). M. and US d0llar. (2013. M. Cape t0wn: Energy Research Centre.c0m/Pr0ducts/Crude0ilPrices. (I0CL) Retrieved JANUARY 2013. (2011-12. slide share. (January 2013. B. Retrieved january 2013. JANUARY-DECEMBER). The Impact 0f Higher 0il Prices 0n the Gl0bal Ec0n0my. Financial Services & Management Research.. 4/23/2013 University of Petroleum and Energy Studies 38 . (2013). R.g0v. fr0m I0CL WEBSITE: http://www. Retrieved fr0m Eaiindustry: http://www. A.). RISE & IMPACT 0F CRUDE 0IL PRICE IN INDIA. IEA. (Dec 8 2000). D. Retrieved fr0m http://www. P. & J0SHI***. (2011). Mys0re: Internati0nal J0urnal 0f Marketing. 0il prices. Retrieved fr0m http://www.data. J. Exchange rate v0latility: an analysis 0f the relati0nship between the Nigerian naira. Master Thesis in Business Administrati0n 15 ECTS. april)..

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