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RBI Working Paper No. 01/2023: Measuring Contagion Effects of Crude Oil Prices on Sectoral Stock Price Indices in India, This paper analyzes the contagion Effects of crude oil prices on the different sectoral stock price indices in India. Furthermore, appropriateness of linear trend, seasonal and cyclical components are also tested in this study. For the purpose of the study, twenty one sectoral indices have been tracked on monthly basis. The crude oil prices were based on two factors – West Texas Intermediate (WTI) and Brent Crude. The results of the study indicated that there is a positive contagion effect of crude oil prices on the Indian sectoral stock prices. Furthermore, the cyclical components of the indices acted as a moderator of the contagion effect implying that the sectoral stock prices of India are not immune to the global shocks of oil. The results revealed that there exists a strong correlation between the crude oil prices and the returns of the sectorial stock price indices in India. However, the direction of this relationship is found to be mixed, i.e., positive as well as negative.

Further, when the returns are regressed on the crude oil prices for the inference of contagion effect, the results suggested that a positive and a statistically significant contagion effect was present in small-scale industries, public telecommunication services and automobile sectors while a negative relation was established in housing, consumer durables and banking sectors. The findings of this study have provided important implications for the sector-level investment decisions. It reveals that investors must take into consideration the risk associated with crude oil prices while making an investment decision in an individual sector.

Moreover, with the increasing volatility of crude oil prices, it is necessary to have a good understanding of the sector-specific sensitivities in order to formulate efficient and effective investment strategies. The paper also assists the policy makers in formulating policy reforms to support different sectors where prices are influenced by the crude oil prices. This will ensure the stable functioning of the respective sectors even if the crude oil prices vary drastically arising from various external and internal factors. Therefore, this research could prove to be especially helpful for the financial market regulators and policy makers in India who need to be aware of the contagion effects of crude oil prices on the stock markets in general and on the different sectoral indices in particular.

The study further reveals that the Granger causality exists between crudeoil and the Indian sectoral stock prices. This implies that changes in crude oil prices tend to significantly affect the sectoral stock prices in India. The analysis also shows that the impact of crude oil prices is highly nonlinear implying that there is a range of prices where the sectoral stock prices will either increase or decrease depending on the current level of the prices.

The paper’s results provide evidence for international investors to better understand the potential of crude oil prices on the Indian stock market. Additionally, the study adds to the knowledge about the contagion effect and helps to create an efficient market for the Indian stock markets.

It is concluded that the contagion effects of crude oil prices have a significant influence on the Indian sectoral stock prices. The Granger causality analysis provides strong evidence that crude oil prices have an impact on the sectoral stock prices in India. Thus, the paper provides a valuable insight into the stock market reaction when it is exposed to the term structure of crude oil prices.


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Disclaimer:  “Neither this article nor the information contained herein shall in any way be construed as forming a contract or shall constitute professional advice required before acting upon any matter. CA Sharad Kumar Sharma has taken all due care in the preparation of this article for accuracy in its contents at the time of publication. However, no liability shall be accepted by him in the event of any direct, indirect or consequential damages arising out of or in any way connected with the use of this article or its contents. “

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April 2024