Author(s)

Amanjot Singh, Rajdeep Singh

Punjabi University, Patiala, India.

For emerging markets like India, where around 80 percent of the crude requirements are met through imports, it is an imperative task to comprehend impact of global crude oil price shocks on Indian macroeconomic variables. The present study attempts to understand these asymmetric dynamic interactions between global crude oil price shocks and Indian macroeconomic variables by employing Markov switching-Vector Autoregressive (MS-VAR) regime-dependent impulse responses in level forms. The findings hold an important place in the wake of inflation targeting regime adopted by the monetary policy authorities. The findings highlight the existence of two regimes, namely lower and higher oil price variance regimes. The response of industrial production and consumer prices is different towards oil price shocks in different regimes. In the lower oil variance regime, there is negative (positive) relationship observed between crude oil shocks and industrial production (consumer prices). On the other hand, there is a positive equilibrium shift in the industrial production in the higher oil variance regime with cost pushing inflationary pressures in the long run. The findings bear strong implication for the policy makers in their attempt to combat effects of crude oil shocks. As per the findings, the emerging market policy makers should display a cautious approach during higher oil price volatile phases in order to support industrial production and consumer demand.

Crude Oil, CPI, IIP, India, Regime Switches, VAR Model

Singh, A. and Singh, R. (2017) How Indian CPI and Industrial Production Respond to Global Oil Price Shocks? Regime-Dependent Impulse Responses. Theoretical Economics Letters, 7, 1511-1531. doi: 10.4236/tel.2017.75102.