Crisis and Calm: Analysing Oil Price Volatility and Exchange Rate Dynamics in India

Abstract

This study examines the volatility of oil prices and its impact on exchange rate dynamics in India across three distinct periods: the financial crisis period (2008-2009), post financial crisis period (2009-2020), and the COVID-19 pandemic period (2020-2023). Using daily data and employing Multivariate GARCH models, the intricate relationship between oil prices and the USD-INR exchange rate is analysed. The findings reveal significant regime-dependent variations in volatility persistence and asymmetric effects. During the financial crisis and pandemic, oil price shocks notably influenced exchange rate volatility, whereas the post-crisis period exhibited relatively smoother dynamics. These insights highlight the critical need for dynamic policy responses to manage exchange rate stability amid global economic fluctuations.