International crude oil prices have a bearing on India’s macroeconomy, but their impact is not seen in the same way on growth and inflation, key components of retail inflation, according to a study by Bank of Baroda. Oil-price shocks tend to show up more clearly in wholesale prices compared with consumer prices, and the connection with real gross domestic product (GDP) is weaker in the long run, according to a study by Bank of Baroda.
The study authored by Dipanwita Mazumdar, economist, Bank of Baroda finds that the retail inflation number, or the Consumer Price Index (CPI), most households actually feel barely budges in response to oil prices in normal times, contrasting with the impact on the Wholesale Price Index (WPI) of inflation.
Using monthly inflation and oil price data from January 1991 to March 2026, the author posits that changes in Brent prices show a positive correlation with wholesale inflation, particularly WPI-Fuel, suggesting that Brent prices and WPI inflation move in the same direction, while the relationship with CPI is absent.
“This is because CPI has a lower weightage of fuel components compared to WPI. Also, the impact of the second round effect is more administered especially for components like petrol and diesel, as the shock is mostly absorbed by the government,” according to the report.
Wholesale prices tell a different story. WPI, which captures what manufacturers and bulk buyers pay, moves much more closely with crude price changes. During the volatile decade between 2026-2007 (FY07) and FY16 — a period that showed “significant volatility in oil prices” — the correlation between Brent and the fuel component of WPI was 0.69, where 1 would be a perfect positive match.
Over the long range, that link essentially disappeared, suggesting oil shocks bite most in concentrated bursts rather than a steady drag, according to the report. Over the long range, the coefficient of correlation was 0.05 with WPI-Fuel and -0.02 with WPI.
On growth, the relationship with GDP and oil prices was statistically significant in the long run, with changes in oil explaining 70 per cent of the variation in GDP, the report found. Over the volatile period, however, the variation explained was higher.
According to the study, crude prices rose by more than 20 per cent in 18 out of 54 years. This includes the current episode led by the West Asia crisis, when prices had already risen 39.7 per cent between February 27 and May 6, this year, as prices stayed above $100 a barrel for 29 days on the trot.
Oil shocks tend to be self-limiting and concentrated in particular years and are not exactly broad-based, according to the study. The peak of price spikes historically lasted six to seven months on average. At the same time, the report suggested that the oil price transmission witnessed an optimal lag of five quarters, implying oil shocks are likely to influence macro variables after a delay, and not immediately.
Source: Business Standard
