Exchange rate of an oil importing economy: an empirical evidence from India

The strength of nation's currency to large extent determines the ability of such nation's economy to respond to major negative external shocks. It is against this background that this paper sets out to examine the exchange rate of an oil importing economy with special reference to India. The study adopt econometrics techniques of vector error correction model (VECM), through unit root tests, Johansen cointegration test, and error correction to establish both short run and long run causality among the variables of the study. The study found slow long run adjustment to equilibrium running from oil importation and average price of crude oil on spot to exchange rate in India for the period under consideration (1986–2012), also there is no short run causality due to tight government policies and government expenditure on subsidy. The study recommend maintenance of tight economic policies to reduce the vulnerability of exchange rate to external shocks.