Effect of Rupee volatility and Crude Oil prices on Indian Macroeconomic

Variables
Section B, Group 3

Objective-With current oil prices rising and rupee taking a windfall in current economic
environment, everyone’s attention is focussed on how the economy will react to it. We would
like to examine the effect of rupee’s current volatility in terms of its impact on
macroeconomic variables like GDP, inflation, interest rate policy, impact on stock market,
foreign investment and CAD of country. Moreover, we would also delve in to the causes of
such changes and understand the interrelationship between rupee volatility and oil prices.
With this analysis we hope to understand how all macro-economic variables are related and
constantly affecting each other. We would also study how the monetary and fiscal policy of
government is reacting to these macro-economic changes around us. The idea is to
understand what is happening around us and relate it to the ideas being taught in class.
We intend to use the empirical studies done in past by researchers to understand how crude
oil have affected the economic landscape. We would also analyse the impact of rupee and
crude oil on fiscal maths of government and how it might be detrimental to Fiscal Deficit,
which will affect other macro-economic variables in turn. We will also review what the
current oil prices will mean foe the oil subsidy policy of government and what rationale goes
behind it. There have been many empirical studies on impact of oil prices vis a vis macro-
economic variables and stock market which will be summarised in our paper.
In terms of rupee volatility, we would firstly discuss the exchange rate regime in India and
how it has changed from fixed to floating rate. After understanding how exchange rate works
we would use empirical data to understand its impact on trade deficit of country and what are
the causes of recent downfall in rupee. The implications in terms of foreign investments and
how RBI is reacting to current changes in rupee. The paper would also cover how rupee
depreciation will affect different sectors of Indian economy and how they will hedge against
such currency risks. We would also summarise relation between rupee exchange rate and
stock markets done in past empirical studies. The idea is to understand how macro events
affect each other in current economic scenario.