The Dominance of Oil Price Fluctuations on India’s Exchange Rate and Foreign Reserves

 

ABSTRACT

Crude oil prices are a major factor in every nation's economic development. More than 70% of India's crude oil needs are met by imports. This article's objective is to analyze how changes in the price of oil affect the expansion of the Indian economy, in particular the exchange rate and foreign reserves.

 

KEYWORDS

Crude Oil price, Growth of Indian economy, Inflation, Imports of crude oil, balance of trade deficit, Exchange Rates, Foreign Reserves

INTRODUCTION

Economic growth cannot be separated from the role that energy plays. Oil continues to be one of the most important energy sources, along with coal, natural gas, electricity, solar, wind, and nuclear energy, in a nation's economy, supporting things like transportation, businesses, and households. India is similar to other countries in this sense, however oil is the major energy source there, making up 31% of primary energy consumption. India is the seventh-largest nation in the world, with a population of more than 1.2 billion. It contributes 17.2% of the global population and has the second-largest population.

As per the Monthly Ready Reckoner January, 2023 (Ministry of Petroleum & Natural Gas), India produces 29.7 MMT( million metric tons) in 2022 and consumed 204.7 MMT of petroleum products as compared to 194.3 MMT in the year 2021.India imports 80% of its crude oil, whereas just 20% is produced domestically by PSUs like ONGC, OIL, and other private entities. Several PSU businesses including IOCL, BPCL, and HPCL as well as private entities like Reliance and Essar refine and process crude oil in India. India is one of the world's top importers of crude oil. India mostly imports crude oil from the Middle East.

Source: www.google.com

A group of 13 significant oil-producing nations known as OPEC generates nearly 40% of the world's crude oil collectively. Around 60% of the petroleum traded internationally is exported by the OPEC. India is the third-largest crude oil importer in the world, after China and the United States. 85 percent of our total imports of petroleum and 94 percent of our purchases of gas come from OPEC nations. Moreover, India is currently importing crude oil from Asia Pacific, Africa, and South America. India imported 120 billion dollars' worth of crude oil in 2022, roughly twice as much as it imported the year before.

Due to India's substantial reliance on oil imports, which is demonstrated in Figure 1, multiple oil price shocks that have an impact on both the domestic economy, directly and indirectly, are most likely to occur.

Figure 1: Share of India's Oil Import

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India

Note: Share of Oil Imports= Total Oil Imports (in dollars)/ Total Oil+Non-Oil Imports(in dollars)

WHY DO OIL PRICES FLUCTUATE?

 

1. The Organization of Petroleum Exporting Countries, or OPEC, is the primary factor affecting changes in oil prices. Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela make up the group known as OPEC, which will consist of 13 nations as of 2021. The consortium decides on production levels to satisfy global demand and has the power to change oil and gas prices by raising or lowering output. Prior to 2014, OPEC promised to maintain oil prices above $100 per barrel for the foreseeable future, but in the middle of the year, the price of oil started to decline. It dropped from a peak of more than $100 a barrel to less than $50 per barrel. In that case, OPEC was largely to blame for the low price of oil since it refused to reduce oil output, which caused prices to fall.
2. Supply and Demand: Oil prices fluctuate according to the principles of supply and demand, just like they do with any other good, stock, or bond. Prices decrease when supply outpaces demand; the opposite is also true when demand outstrips supply. Reduced oil demand in Europe and China, along with a consistent supply of oil from OPEC, have been blamed for the sharp decline in oil prices in 2014. Oil prices dropped significantly as a result of the excess supply. Oil prices are influenced by supply and demand, but oil futures actually determine the price. A legally binding contract known as an oil futures contract gives the buyer the right to purchase a barrel of oil at a certain price in the future. The buyer and seller of the oil are required to complete the transaction on the date specified in the contract.
3. Natural Disasters: Another element that may affect oil prices is natural disasters. For instance, the price of oil increased by $13 a barrel when Hurricane Katrina hit the southern United States in 2005, hurting over 20% of the country's oil supply. The Mississippi River's flooding in May 2011 also caused changes in oil prices.
4. Political Instability: Since the Middle East produces the majority of the world's oil supply, political unrest in the region has an impact on oil prices globally. For instance, in July 2008, a barrel of oil cost $128 because of unrest and consumer apprehension over the conflicts in Afghanistan and Iraq.
5. Production Cost and Storage: Oil prices might fluctuate due to production expenses as well. While it costs less to extract oil in the Middle East, it costs more to do so in Canada's oil sands.If the only oil left is in the tar sands, the price might theoretically increase if the supply of cheap oil runs out. The price of oil is also directly impacted by U.S. output. Due to the extreme overstock in the market, a drop in output lowers total supply and raises prices.
6. Interest Rates: One of the fundamental hypotheses contends that as interest rates rise, manufacturers' and consumers' expenditures increase, resulting in less time and money spent driving overall. Less demand for oil results from fewer vehicles on the road, which can lower oil costs. This is what we would refer to as an inverse correlation. According to the same principle, when interest rates fall, people and businesses can borrow and spend money more easily, which increases the demand for oil. More consumers bid up the price of oil the more it is used.

                    

  Figure 2: Oil Price Fluctuations over 2012-2022

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India (Prices in Dollars)

 

 IMPACT OF RISING CRUDE OIL PRICES ON THE INDIAN ECONOMY

●      India has a current account deficit because it imports more than 86% of its oil needs. India's import bill would grow due to the increase in crude oil prices, which will cause the CAD to worsen (difference between import and export).

●      The consumer price index (CPI) is also significantly impacted by rising crude oil prices. As a result, inflation rises in tandem with rising crude oil prices.

●      It is the discrepancy between what the government receives in direct and indirect taxes and what it spends. The price of gasoline won't go up if the government decides not to pass on the increases in crude oil prices to the customer. But, somebody needs to absorb the blow. It will be the Indian government in this instance. That will result in a budget deficit, which is never beneficial to the economy.

●      The RBI will need to raise interest rates in order to contain inflation as a result of rising crude oil prices. It will result in less expenditure, which will slow down the nation's growth.

●       Oil import costs would increase for net oil importers like India as the price of oil rises on the global market. A rise in the price of oil globally will affect the trade deficit. Because of the rise in inflation brought on by rising oil prices, actual GDP growth has been much slower.

●      This connects domestic inflation to global pricing. A typical developing nation like India that is seeing an increase in the price of oil on the global market would see an increase in the general price level as a result of both direct consumption of oil at the higher price and an increase in the cost of producing final goods that utilize oil as an input.

●      If there is not a complete pass-through, an increase in the price of oil internationally will result in a higher oil subsidy, which will increase the government's revenue spending. Additionally, oil prices in India are subsidized, but they also generate significant tax revenues for the federal government and the states. Due to an increase in ad valorem tax collections on oil and petroleum products, which must be netted out to determine the net contribution to the government's oil subsidy, an increase in the price of oil internationally would result in higher revenue receipts.

Source: www.google.com

 

IMPACT OF OIL PRICE FLUCTUATIONS ON EXCHANGE RATES

The terms of trade channel, the wealth effect channel, and the portfolio reallocation channel are three direct transmission pathways of oil prices to exchange rates that have been taken into consideration in the literature (Buetzer et al, 2016). Amano and van Norden introduced the terms of trade channel (1998a, b). The fundamental concept, according to Bénassy-Quéré et al. (2007), is to relate the price of oil to the price level that influences the real exchange rate. The output price of a country A's non-tradable sector will rise in comparison to a country B's non-tradable sector if the former uses more energy than the latter. This suggests that greater inflation causes the currency of country A to really appreciate (Chen and Chen, 2007; Buetzer et al., 2016). 

If the assumption that the price of tradable products is fixed is abandoned, effects on the nominal exchange rate follow. In this situation, purchasing power parity serves as a link between the fluctuations of the nominal exchange rate and inflation (PPP). We anticipate that the tradable currencies of nations with significant oil dependence will fall as a result of greater inflation if the price of oil rises. As the price of the tradable (and non-tradable) commodities mentioned above changes, it will have an effect on how the real exchange rate reacts, depending on how the nominal exchange rate changes. Overall, depending on how prices are adjusted, the causality encoded in the terms of trade channel may persist over various time horizons.

 

 

Figure 3: Oil Price and Exchange Rate Causality

Source: https://www.eia.gov/workingpapers/pdf/oil_exchangerates_61317.pdf

The fundamental concept of the portfolio and wealth channel was first proposed by Krugman and Golub in 1983 and has since been reexamined by Bodenstein et al (2011). The underlying concept is that when the price of oil increases, wealth is transferred to oil-exporting nations (BénassyQuéré et al., 2007). The resulting short-run impact is reflected in the wealth channel, while the medium- and long-term effects are evaluated in the portfolio channel. When oil prices increase, wealth is transferred to oil-exporting nations (in US dollars), which is represented in an increase in exports and a positive current account balance (in local currencies). Because of this, we anticipate that with a rise in oil prices, the currencies of oil-exporting countries will strengthen and the currencies of oil-importers will depreciate effectively (Beckmann and Czudaj, 2013b). If oil-exporting nations reinvest their earnings in US dollar assets, the wealth effect may also create a short-term increase in the value of the US dollar.

 According to the portfolio effect, two factors will have an impact on the US dollar's short- and medium-term movements in relation to the currencies of oil exporters. The first is the US's reliance on oil imports in comparison to the percentage of US exports to nations that produce oil. The second is the relative preference of oil exporters for US dollar assets.

 

Figure 4: Wealth and Portfolio channel

Source: https://www.eia.gov/workingpapers/pdf/oil_exchangerates_61317.pdf

Oil prices have a significant impact on the Indian exchange rate, according to Hidhayathulla et al. (2014) in their study "Relationship between International Crude Oil Price and the Inflation Rate (CPI) in India from 2011 to 2014," but according to Kaushiket (2014) in his study "Oil Prices and Real Exchange Rate," there is no discernible impact of oil price change on the real exchange rate between the Indian rupee and the US dollar. Most often, as the price of crude oil rises, the cost of production inputs follows suit. As a result, prices for goods and services rise as well, which ultimately drives up the country's inflation rate. However, this process doesn't end there; it will also have an impact on consumer purchasing power, global trade, and the value of currencies. In essence, a few factors also have an impact on the price of crude oil. The number of producers, natural disasters, fresh inventories, and customer demand are some of them. In addition, the Indian government has taken several actions to lessen the effects of rising oil costs.

We anticipate that Indian exports would rise as the value of the rupee falls against the major foreign currencies, making items made in India more affordable abroad. Conversely, depreciation raises the cost of imports, which could lead to a decrease in the amount of imports as domestic products and services begin to replace imports due to the rise in the relative cost of imports. In this case, a depreciation of the rupee will raise net exports and hence increase GDP.

The average price of a barrel of Indian crude oil in March 2020 was $33.36 per barrel, down from $66.74 in March 2019. Due to a drop in demand during the pandemic era, crude oil prices have dropped by over two-thirds since the start of the year 2020. The rupee's value has declined against the dollar, nevertheless, offsetting this decline.

 

   Figure 5: Trend in Indian Exchange Rate in respect to Dollars

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India (Prices in Dollars)

IMPACT OF OIL PRICE FLUCTUATIONS ON FOREIGN RESERVES

Talking about foreign reserves, all asset owners, including citizens of oil exporting nations, will be impacted by a decline in asset prices and dividends in countries that import oil because of an increase in the price of crude. On the other hand, asset prices in oil-exporting nations will rise, affecting all asset owners once more, including citizens of oil-importing nations. Therefore, the effect of changes in oil prices on the current account and changes in net foreign assets (NFA) may be mitigated by capital gains and income flows. Usually, the prices of bonds, stocks, and currency rates react considerably more quickly than the costs and quantities of things.

The country's foreign exchange reserves, which are under the custody of the Reserve Bank of India (RBI), have decreased for a fifth week in a row as of April 8. Over these weeks, there was a sizable $28.5 billion decline overall. This has caused considerable anxiety, particularly given the possibility that a protracted Russia-Ukraine crisis may reinforce the trend and result in a significant depletion of reserves, worsening the nation's balance of payments. Between 2019 and September 2021, the growth of India's foreign exchange reserves, which are primarily made up of holdings of foreign currency assets, was constant. The assets making up the remaining 35–40% of India's foreign exchange reserves are held in other global currencies, such as the euro, pound, and yen, albeit they are expressed in dollar terms. The component of foreign currency assets reached $580 billion around the same time as the Forex reserves reached their peak of $642.5 billion for the week ending September 3. In contrast, the reserves' size on August 8 was just over $604 billion, with currency assets totalling about $537 billion. This means that the reserves' decline was primarily the result of a valuation loss brought on by the US dollar's appreciation against other advanced-economy currencies and the RBI's recent sales of dollars to support the rupee. The RBI may stick with its current approach to the currency market up till the cycle of net FPI outflows from the Indian market turns. According to Banerjee, additional significant depletion of the reserves might not occur if oil prices remain stable. However, she noted that a faster depletion of India's reserves should not be ruled out if oil rises to $140 per barrel and capital outflows pick up speed.

For the time being, FPIs won't invest in Indian assets since they are made unattractive by high oil prices, rising US bond yields, and the global strength of the US dollar. Because the rupee offers excellent relative real rates compared to the US dollar, carry traders are still invested in it. Investors can sustain their faith in the currency thanks to the RBI's aggressive actions. The central bank had earlier stated that the market would not determine the value of the rupee. If oil prices remain at $100, the RBI can help to keep the rupee stable. However, if oil prices rise much from here, there could be significant pressure on the rupee to depreciate, according to Banerjee.

 

CONCLUSION

The shocks have consequential impact on the Indian economy. The RBI should therefore acknowledge the significance of macroeconomic variables in the examination of monetary policy. Oil price changes that are unfavourable have a positive long-term impact on output, while also momentarily lowering prices and short-term strengthening of the currency. To control inflation and the exchange rate, the central bank adopts an expansionary monetary policy, which can result in greater output growth. For the Indian context, it is necessary to further investigate how the economy reacts asymmetrically to positive and negative shocks to oil prices.

A medium- to long-term drop in output, demand for money, and the price of oil globally is brought on by rupee depreciation. It briefly increases inflation because of its tiny impact. RBI implements a contractionary monetary policy in an effort to save the domestic currency. The globe shouldn't disregard the global ramifications of rupee fluctuations, which can lead to huge changes in global oil prices.

In order to raise the production potential frontier, the policy of setting an exchange rate at a very competitive level may not be advantageous and may even be quite risky for India. Instead, India should concentrate on structural reforms to address supply-side bottlenecks, particularly in the resource and energy sectors. Examples of such policies include measures to promote exports such optimal resource allocation and permitting private sector participation in the energy sector. For the development of alternative energy technologies that will lessen India's reliance on oil imports, more money must be invested in research and development.

 

REFERENCES

1. Amano, R. A., and Van Norden, S. (1998a). Oil prices and the rise and fall of the US real exchange rate. Journal of International Money and Finance, 17(2), 299-316.
2. Amano, R. A., and Van Norden, S. (1998b). Exchange rates and oil prices. Review of International Economics, 6(4), 683-694.
3. Beckmann, J., and Czudaj, R. (2013a). Oil prices and effective dollar exchange rates. International Review of Economics & Finance, 27(1), 621-636.
4. Beckmann, Czudaj, Arora, “The Relationship between Oil Prices and Exchange Rates: Theory and Evidence”
5. Bénassy-Quéré, A., Mignon, V., and Penot, A. (2007). China and the relationship between the oil price and the dollar. Energy Policy, 35(11), 5795-5805.
6. Chen, S.S., and Chen, H.C. (2007). Oil prices and real exchange rates. Energy Economics, 29(3), 390-404
7. Ghosh, Taniya “Oil Price, Exchange Rate and the Indian Macroeconomy”
8. Golub, S. (1983). Oil prices and exchange rates. The Economic Journal, 93(371), 576-593.
9. Kali Charan,. Pallabi Mukherjee “A Study on Impact of Crude Oil Price Fluctuation on Indian Economy”
10. Krugman, P. (1983). Oil and the dollar. In B. Jagdeeps, & P. Bulfordh (Eds.), Economic interdependence and flexible exchange rates. Cambridge, MA: MIT Press.
11. Narendra,Hiranmoy Roy, Anshuman Gupta “Crude oil import of India from its major oil trade partner countries: An empirical evidence using panel data analysis”
12. Snapshot of India’s Oil & Gas data Monthly Ready Reckoner January, 2023 Petroleum Planning & Analysis Cell (Ministry of Petroleum & Natural Gas)

Ms. Mahek Khanna, MA Economics (batch 21-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. mahekkhannaa@gmail.com

A STUDY ON MARKET ANOMALIES BASED ON NIFTY INDEX

 ABSTRACT

Market anomalies are something which are inconsistent with the efficient market hypothesis (EMH). Anomalies are the ones  which generate abnormal returns/profits to the investor which are above the expected rate of return generated by the efficient markets. Anomalies are considered when there is a trend in the market. If an anomaly is known by everyone in the market then the advantage of this anomaly is taken by every investor in the market and the abnormal profit then scatters away and only normal profits are generated by the investors which are then consistent with the efficient market hypothesis. An anomaly is first found through data mining or data snooping through aggressive research by going through its data of historical prices and volume movements and then causes for such an anomaly are then researched. In this research paper of mine I am going to take the nifty 50 index as my base subject then try to find different market anomalies like turn of the month effect(January effect), weekend effect and turn of the year effect. Nifty 50 index is a portfolio of securities of 50 diversified companies comprising 13 sectors. Nifty midcap 50 captures the movement of the midcap segment of the market and Nifty smallcap 50 captures the movement of the smallcap segment of the market.They are managed by the National Stock Indices which is a subsidiary of NSE Strategic Corporation limited. It was established on 21st April 1997. They are a free float market capitalization weighted index in which market capitalization is found by market price multiplied by number of outstanding shares in the market excluding the number of shares held by the promoters of the company.

KEYWORDS : 

Efficient Market Hypothesis (EMH), Market Anomalies, Turn of the Year Effect (January), Turn of the Month Effect and Weekend Effect.

 

INTRODUCTION

EFFICIENT MARKET HYPOTHESIS (EMH)

 

Efficient market hypothesis (EMH) is a term coined by Harry Roberts (1967) which was developed independently by Fama (1963,1965) and Samuelson (1965). Many other researchers claim its origin in their research work but its due credit is given to Eugene Fama. EMH states that current market price of the shares reflects all the information available in the market, I.e., market participants have all the information related to that company shares. Market participants can only earn normal profits in the market only and passive investment strategy is favorable to the investors. Passive investment strategy is that the investors are following a certain benchmark (like index, shares, etc). In passive investment strategy investors earn equal to their benchmark returns. Whereas in active investment strategy investors use their own investment techniques or strategies for investment and there is also high transaction costs associated with investors buying or selling the assets in this strategy. In active investment strategy investors try to earn above the benchmark. In EMH passive investment strategy is followed and investors earn only equal to their benchmark or normal profit rather than abnormal profits which the active investment strategy tries to earn. EMH describes three types of market:- weak form efficient , semi-strong form efficient and strong form efficient.

 MARKET ANOMALIES

 Market anomalies arise when there are inefficiencies in the market as they should be because markets are formed by investors who are  irrational  and not only  by the rational investors as theories state. The market is driven by people’s sentiments, biases  and not just with the pure rational thought process. Due to anomalies individuals are able to earn abnormal profits than normal profits as stated in EMH. Prices of the stock are different than as predicted by the EMH prices .Anomalies can be of various types like turn of the year effect(January effect) , turn of the month effect, weekend effect, stock split effect etc. Causes of these anomalies  can be because new information doesn’t quickly  adjust , tax treatments are different, adjustments of cash flows and behavioral constraints of the investors. Anomalies are found after a long aggressive data  snooping  by viewing all the past data related to trading volumes and prices and if there is a pattern found, reasons for its occurrence are to be investigated as to why this is happening. By following such patterns investments are made so that abnormal profits can be made and an  active investment strategy approach is taken in this. Volatility of the stock market also influences the inefficiencies in the stock market, more volatile the stock market more inefficiencies it have.

Source: www.google.com

TURN OF THE YEAR EFFECT (JANUARY)

 Turn of the year effect states that there is a pattern of increased volume and higher price movement during the last week of December and first two weeks of January. The January effect is the same as of the turn of the year effect but it is stated that small cap company stocks outperforms the market during the first two or three weeks of January. It can be due to window dressing by companies.

TURN OF THE MONTH EFFECT

 Turn of the month effect states that during the last four days of the month and starting three days of the next month there is an increase in trading volume and higher stock prices.

WEEKEND EFFECT

 Weekend effect states that on Mondays stock prices tend to decrease and on Fridays stock prices tend to rise or increase. It can be attributed to bad news released by companies after the closing of the Market on Friday.

OBJECTIVE OF THE STUDY 

In this study I wanted to find out the following :

•        To find market anomalies in the Indian stock market index Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50.

•        To Compare market anomalies between the three indices : Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50.

Source: www.google.com

 METHODOLOGY

 Daily data of  stock closing prices  has been collected from National Stock Exchange (NSE) for 12 years from 2010-2021 of all the three indices Nifty 50, Nifty midcap 50 and Nifty smallcap 50. Data is collected from secondary sources. Multiple linear regression with dummy variable is applied. 2978 observations are used for turn of the year effect (January) and weekend effect. For the turn of the month effect 2976 observations are used.

ANALYSIS

Stock returns are calculated by :

Rt = ln(Pt/Pt-1) = ln(Pt) - ln(Pt-1)

 Where Rt represents log return of closing stock price,

Pt represents the closing stock price of the present day and Pt-1 represents the  closing stock price of the previous day. Log stock returns are chosen over linear returns because it is very easy to calculate and they give a first order difference of logarithmic prices.

Dummy variable multiple linear regression model is used for finding the market anomalies. Dummy variables  take only two values 1 and 0. 1 represents presence of an attribute and 0 represents absence of the attribute. For the dummy variable model, if there are 'n' numbers of variables then n-1 number of dummy variables should be used. One variable should be omitted as it is represented by the intercept of the model. Total observations for each market anomaly from 2010-2021 is 2978.

For finding the Turn of the year effect (January effect) we have used :

Nifty return = b0 + b1d1(January) + b2d2(April) + u

 As financial year for many countries have different starting period ,i.e., for USA it is January to December and for India it is April to March so we have collected data concerning each financial year :

Nifty return = b0 + b1d1(January) + b2d2(April) + u

 b0 = represents returns in other months other than January and April

b1 = coefficient which represents return on January

d1(January) = dummy variable used for indicating the presence of January or not

b2 = coefficient which represents return on April

d2(April) = dummy variable used for indicating the presence of April or not

 For finding the turn of the month effect we have used a return interval of seven days which comprises first days of the current starting of the month and last four days of ending of previous month.

                                                Nifty return = b0 + b1d1(TOM) + u

 Where b0 = interest represents returns on other days of the month

b1 = coefficient represents returns on Turn of the Month (TOM)

d1(TOM) = dummy variable indicating the presence of TOM or not

 For finding the weekend effect we have used :

Nifty returns = b0 + b1d1(Monday) + b2d2(Friday) + u

Where b0 = intercept which represents returns on rest of the days other than Monday       

                     And Friday

 b1 = coefficient which represents return on Monday

d1(Monday) = dummy variable used for indicating the presence of Monday or not

b2 = coefficient which represents return on Friday

d2(Friday) = dummy variable used for indicating the presence of Friday or not 

HYPOTHESIS 

For Turn of the year effect return on all the months is same ,i.e.,

 

H0 : b0=b1=b2 

H1 : at least  one is indifferent

For Turn of the month effect return on all days of the month are same ,i.e.,

 H0 : b0=b1

 H1 : at least one is indifferent

For Weekend effect return on Monday and Friday and other days of the week are same ,.i.e.,

 H0 : b0=b1=b2

 H1 : at least one is indifferent

 If the dummy variable for any one day or month is significant , we know that effect is significant of the anomaly which the dummy variable is representing then we are rejecting the null hypothesis and accepting the alternate hypothesis. If there is no significant pattern of anomaly found then we are accepting the null hypothesis and rejecting the alternate hypothesis.

 

CONCLUSION

 All the three indices Nifty 50, Nifty Midcap 50 and Nifty Smallcap 50  are showing positive turn of the month effect  and Nifty 50 is also showing positive returns on other weekdays like Tuesday, Wednesday and Thursday. All three indices are showing negative returns on Monday but it is found to be statistically insignificant and Nifty 50 and Nifty Smallcap 50 is also showing negative return on Friday, So weekend effect is not present in all the three indices but Nifty 50 is showing another anomaly with positive returns on other weekdays which is statistically significant. All the three indices are showing negative return on January effect ( turn of the year effect ) and positive return on April ( financial year starting of Indian Market) but it is also statistically insignificant and also for January effect, So turn of the year effect (January) is also not present in Indian stock markets Nifty 50, Nifty Midcap 50 and Nifty Smallcap 50. Comparatively all the indices are showing the same market anomaly except Nifty 50 which is also showing another market anomaly other than the two indices.Nifty Midcap 50 is showing highest return than Nifty Smallcap 50 and Nifty 50 in turn of the month effect and Nifty Smallcap 50 is showing greater return than Nifty 50 on turn of the month effect. So in the end the Indian market Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50 are still not efficient.

REFERNCES

Abraham Abraham, & Ikenberry, D. L. (1994). The Individual Investor and the Weekend Effect. The Journal of Financial and Quantitative Analysis, 29(2), 263–277. https://doi.org/10.2307/2331225

Amarnani, Neeraj and Vaidya, Parth, Study of Calendar Anomalies in Indian Stock Markets (January 1, 2014). Amarnani, Neeraj and Parag Rijwani (Eds.) (2014) Perspectives on Financial Markets and Systems - Market Efficiency, Behavioural Finance and Financial Inclusion, (Ahmedabad, Institute of Management, Nirma University), Available at SSRN: https://ssrn.com/abstract=2398195

Arendas, Peter & Kotlebova, Jana. (2019). The Turn of the Month Effect on CEE Stock Markets. International Journal of Financial Studies. 7. 57. 10.3390/ijfs7040057.

Dutta, Abhijit (2017). Day-of-the-Week and Other Market Anomalies in the Indian Stock Market.(Bengal, University of North Bengal), Available at https://ir.nbu.ac.in/handle/123456789/2958.

French, R. Kenneth (1980). Stock returns and the weekend effect, Journal of Financial Economics, Volume 8, Issue 1,Pages 55-69,ISSN 0304-405X.

Harshita & Singh, Shveta & Yadav, Surendra. (2019). Unique Calendar Effects in the Indian Stock Market: Evidence and Explanations. Journal of Emerging Market Finance. 18. S35-S58. 10.1177/0972652719831549.

Huynh, Nhan. (2021). Turn-Of-The-Year Effect in Asia Pacific stock markets: New Evidence. SSRN Electronic Journal. 10.2139/ssrn.3799914.

Kunkel, Robert & Compton, William & Beyer, Scott. (2003). The turn-of-the-month effect still lives: The international evidence. International Review of Financial Analysis. 12. 207-221. 10.1016/S1057-5219(03)00007-3.

Potharla, Srikanth & Neeraja, Dr. (2014). Anomalies in Indian Stock Market - An Empirical Evidence from Seasonality effect on BSEIT Index. Researchers-world: Journal of Arts, Science & Commerce. V. 109-116.

Safeer, Mohammed & Kevin , Dr. S & S. , Archana (2014). A Study on Market Anomalies in Indian Stock Market. International Journal of Business and Administration Research Review. Vol.I , Issue No.3, Jan-March 2014.

Mr. Tarun Kumar Kadyan, BA Hons. Economics (batch 20-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. tarunkadyan17@gmail.com

How Could the Russia-Ukraine War Impact the Indian Economy in 2022?

 

The ongoing conflict between Russia and Ukraine has been a major topic of international discussion and concern for several years now. However, the implications of the situation extend far beyond the borders of these two countries. In this article , we will explore how the conflict could potentially impact the Indian economy in 2022. With India being one of the fastest-growing economies in the world, any global events can have a significant impact on its economy. We will discuss the potential effects of rising oil prices, trade restrictions, and the impact on Indian businesses. By delving into the economic implications of the Russia-Ukraine war, we aim to provide you with a comprehensive understanding of how this conflict could affect the Indian economy and your finances.

 

Introduction to the Russia-Ukraine War and its potential impact on the global economy

The Russia-Ukraine War has been ongoing since 2014, with both sides experiencing military, economic, and diplomatic consequences. The conflict has had a significant impact on the global economy, with countries around the world feeling the effects of the war through trade disruptions, energy supply instability, and political tensions. Russia is a major exporter of oil and natural gas, and Ukraine has an important role in transporting these resources to Europe. The conflict has disrupted energy supplies, leading to higher prices and increased uncertainty in the global energy market. Additionally, the war has led to economic sanctions being imposed on Russia, which has further hurt the country's economy and caused ripple effects throughout the global financial system. As the conflict continues in 2022, it is important to examine how it may impact various countries, including India.

Source: www.google.com

Overview of India's economic ties with Russia and Ukraine

India's economic ties with Russia and Ukraine are significant, and any conflict between the two nations could have far-reaching consequences on the Indian economy. Russia has been a longstanding strategic partner of India, with both nations sharing a strong defense and energy partnership. India relies heavily on Russia for critical defense equipment and technology, including the BrahMos missile system, the T-90 tanks, and the Sukhoi Su-30MKI fighter jets. India also imports a significant amount of crude oil and natural gas from Russia, which is critical to meet the country's energy demands.

On the other hand, India's economic ties with Ukraine have been growing steadily over the years. Ukraine is a major exporter of agricultural commodities such as wheat, maize, and barley to India. Furthermore, the two nations have been exploring ways to expand their bilateral trade and investment ties, with a focus on sectors such as IT, pharmaceuticals, and aerospace.

Therefore, any escalation of the Russia-Ukraine conflict could have significant implications for the Indian economy. If Russia were to cut off its energy supplies to India or restrict its defense exports, it could result in a severe energy and defense equipment shortage for India. Similarly, any disruption to Ukraine's agricultural exports could impact food prices in India, which is already grappling with high inflation.

In conclusion, India's economic ties with Russia and Ukraine are crucial, and any conflict between the two nations could have significant implications for the Indian economy. It is crucial for India to maintain a delicate balance between its strategic partnerships with Russia and its growing economic ties with Ukraine.

 

How the war could affect India's trade and investment relations with Russia and Ukraine

The ongoing conflict between Russia and Ukraine could have significant impacts on India's trade and investment relations with these two nations. India has a strong economic relationship with both countries, with Russia being one of India's major defense equipment suppliers, and Ukraine being a major source of wheat, sunflower oil, and other agricultural products for India.

If the conflict between these two nations escalates, India's trade and investment relations with both countries could be adversely affected. For example, if Russia decides to impose economic sanctions on Ukraine, it could impact India's wheat and sunflower oil imports from Ukraine, leading to higher prices for these commodities in the Indian market. Similarly, if India's defense equipment supplies from Russia are disrupted due to the conflict, it could impact India's defense preparedness.

Moreover, the war could also impact India's wider foreign policy goals in the region. India has been pursuing closer ties with both Russia and Ukraine, and any instability in the region could impact India's efforts to deepen its strategic partnerships with these countries.

Overall, the Russia-Ukraine war could have significant economic and strategic implications for India, and it will be important for policymakers to closely monitor the situation and take appropriate measures to safeguard India's interests.

 

Potential impact on India's energy security and oil prices

The ongoing Russia-Ukraine war could have a significant impact on India's energy security and oil prices. As two of the largest oil exporters in the world, any disruption in their oil supply chain could lead to a significant increase in oil prices globally. India, being the world's third-largest oil importer, could be adversely affected by any such price hikes.

Russia is one of India's key oil suppliers, and any disruption in its oil supply chain could lead to an increase in oil prices in India. This could have a domino effect on other sectors of the Indian economy, particularly on transportation, manufacturing, and agriculture, where the use of petroleum products is significant.

Moreover, India's energy security could also be threatened if the conflict escalates and leads to a disruption in the supply of liquefied natural gas (LNG) from Russia. India is heavily dependent on LNG imports, and any disruption could lead to a shortage of gas supply, which could have serious implications for the country's power sector.

In conclusion, the ongoing Russia-Ukraine war could have a far-reaching impact on the Indian economy, particularly on oil prices and energy security. The Indian government needs to closely monitor the situation and take appropriate measures to mitigate any adverse impact on the country's economy.

 

 

How the war could affect Indian exports and imports

The ongoing conflict between Russia and Ukraine could have a significant impact on the Indian economy in 2022, especially in terms of exports and imports. India has a strong trading relationship with both countries, with Russia being one of India's top defense suppliers and Ukraine being a major exporter of grains and other agricultural products to India.

If the war between Russia and Ukraine escalates, it could disrupt the global supply chain and significantly impact Indian exports and imports. India imports a significant amount of coal, oil, and natural gas from Russia, and any disruption in supply could lead to an increase in prices and affect the country's energy security. On the other hand, India exports a variety of goods to both countries, including pharmaceuticals, textiles, and engineering goods. Any disruption in trade could lead to a decline in Indian exports and affect the country's balance of trade.

Furthermore, the war could lead to geopolitical instability and impact the Indian rupee's exchange rate with other currencies. This could lead to inflation and affect the purchasing power of Indian consumers. Therefore, it is essential for the Indian government and businesses to monitor the situation closely and take necessary measures to mitigate any potential impact on the Indian economy.

 

Impact on the Indian rupee's exchange rate

The Russia-Ukraine War could have a significant impact on the Indian rupee's exchange rate. As we know, the Indian economy is heavily dependent on imports of commodities like crude oil and natural gas. Since Russia is one of the major exporters of crude oil and natural gas to India, a disruption in the supply chain due to the ongoing war could lead to an increase in the global prices of these commodities. This, in turn, could lead to a widening of India's current account deficit, which could put pressure on the Indian rupee's exchange rate.

Moreover, if the war escalates and leads to a wider conflict involving major global powers, it could lead to a flight of capital from emerging market economies like India. This is because investors tend to move their money to safe-haven assets like the US dollar during times of geopolitical uncertainty. This could lead to a significant depreciation of the Indian rupee's exchange rate vis-a-vis the US dollar, making imports more expensive and potentially leading to higher inflation.

Overall, the Russia-Ukraine War could have a significant impact on the Indian economy, and policymakers will need to closely monitor the situation and take appropriate measures to mitigate any adverse effects on the Indian rupee's exchange rate.

 

Possible impact on India's defense and security policies

The Russia-Ukraine conflict has the potential to impact India's defense and security policies in several ways. Firstly, India has traditionally maintained friendly relations with both Russia and Ukraine, and the outbreak of hostilities between the two countries could put India in a diplomatic bind. India will have to balance its relationships with both countries to avoid being seen as taking sides, which could impact India's image as a neutral player in international relations.

Secondly, the conflict could impact India's military procurement policies. India has been a major buyer of Russian defense equipment, with over 70% of its military hardware coming from Russia. If the conflict escalates, Russia may prioritize its defense needs, leading to delays or cuts in the supply of defense equipment to India. This could impact India's military preparedness and lead to a greater reliance on other countries for its defense needs.

Finally, the conflict could impact India's energy security. Ukraine is a key transit route for Russian gas exports to Europe, and any disruption in gas supplies could impact global energy prices. India, which is heavily reliant on imported energy, could face higher energy costs, leading to inflationary pressures on the Indian economy.

In conclusion, the Russia-Ukraine conflict has the potential to impact India's defense and security policies in several ways. India will need to navigate these challenges carefully to ensure that its relationships with both countries remain intact and its national interests are protected.

 

India's response to the crisis and its role in mediating the conflict

India has a significant role to play in mediating the Russia-Ukraine conflict. Being a global player and a non-permanent member of the United Nations Security Council, India can provide a neutral platform for dialogue and negotiations between the two nations.

India has traditionally maintained good relations with both Russia and Ukraine and can leverage this to facilitate a peaceful resolution to the conflict. India can use its soft power to bring both nations to the negotiating table and help them find a common ground for a lasting peace agreement.

Furthermore, India's economic interests are also at stake in the conflict as Russia is one of India's major defense partners and a significant supplier of oil and gas. Any escalation of the conflict could have adverse effects on India's energy security and overall economic stability.

Therefore, India's response to the crisis must be measured and balanced, taking into account the interests of all parties involved. India must use its diplomatic and economic influence to foster peace and stability in the region and ensure that the conflict does not escalate into a broader global crisis with severe repercussions on the Indian economy.

 

Mitigating the impact of the war on the Indian economy

 

The Russia-Ukraine war has the potential to impact the Indian economy in various ways, such as increasing oil prices, affecting trade and investment, and causing instability in global financial markets. However, there are ways to mitigate the impact of this conflict on the Indian economy.

One way to reduce the impact of rising oil prices is to invest in alternative energy sources, such as solar or wind power, which can help reduce dependence on oil and gas. Additionally, the Indian government can consider implementing policies to encourage energy efficiency and conservation to reduce overall energy consumption.

Another way to mitigate the impact of the war is to diversify trade and investment partners. India can consider strengthening economic ties with other countries and regions, such as Southeast Asia, Africa, and Latin America, to reduce dependence on Russia and Ukraine.

 

Furthermore, the Indian government can take steps to ensure stability in the financial markets by closely monitoring the situation and implementing measures to stabilize the economy if needed. This can include providing fiscal and monetary stimulus to support businesses and individuals affected by the conflict.

Overall, while the Russia-Ukraine war may have far-reaching consequences, there are steps that can be taken to minimize the impact on the Indian economy. By investing in alternative energy, diversifying trade and investment partners, and ensuring financial stability, India can navigate through this challenging period with resilience and strength.

 

Conclusion and final thoughts on the potential impact of the Russia-Ukraine War on India.

In conclusion, the Russia-Ukraine War could have a significant impact on the Indian economy in 2022. Given India's close trade ties with both Russia and Ukraine, any disruption in the supply chain could lead to an increase in the prices of essential goods such as oil and gas. This could lead to inflation and negatively affect the purchasing power of Indian consumers, leading to a slowdown in economic growth.

Furthermore, the possibility of India getting dragged into the conflict due to its geopolitical position cannot be ruled out. Any military involvement could have severe consequences for the Indian economy, including a decrease in foreign investment and the disruption of trade relations with other countries. It is, therefore, crucial for the Indian government to monitor the situation closely and take necessary steps to mitigate any potential economic impact.

In conclusion, while the full impact of the Russia-Ukraine War on the Indian economy is yet to be seen, it is clear that it has the potential to cause significant disruption. It is crucial for businesses and policymakers to prepare for any potential economic impact and take necessary measures to safeguard the Indian economy.

Ms. Siya Sardana, BA Hons. Economics (batch 20-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. sivya13022002@gmail.com

Budget 2023-24

 Finance brings its finest reshuffle,

For the Economics Budget of ’23 – 24                                  

It has been a long wait from last year,

But the tally of outlay is so clear.                        

Source: Image taken from Google

Reforms and policy profits are set in place,

Tapping from all sources like there is no fore-grace,     

Implementation of schemes for nation’s well-being,

Which can’t be ignored, but shall only bring more seeing.

Disbursement of funds is a painstaking cycle,

To infuse with life, improve ways of hustle,

Diverse credit system across growth pattern,

Enriched with debt-swaps and new civic urban.

Investment opportunities reign in events,                            

As the start-up cult it surely invents,

Improved right to citizens and corporate perks,

Now that’s a budget that’s bound to help with works.

Redefining scope of revenue resources,

Stable governance and sensible services,

The 2023-2024 budget is sure to succeed,

Bringing glory with socio-economic creed.

Ms. Siya Sardana, BA Hons. Economics (batch 20-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. sivya13022002@gmail.com

What will be the recourse of Economics for a Common Good in Future - A Psycho-Analytic Explanation of the World Order (A Short Essay)

  The question with which this piece starts is at the heart of understanding the future solutions to many questions of a probable dystopic future world. While Economics or Economists look for a rationale of an economic incentive or action deciding an individual behaviour, often such behaviour can infringe upon the collective common good or goal. Hence, the new paradigm of finding out solutions to many questions of a dystopic future world is lying at the core of developing a new lens. The new lens might not always be a theoretical, dogmatic foundation principle of micro, macro, development, mathematical economics. Rather, this new lens can actually emerge from a complex disciplinary thinking of an economic problem for addressing a common good for future. The course of such a thinking can be enmeshed or be a maze of reflection of various disciplinary thoughts arising from a wide range of critical thinking. However, in this piece, I will largely put forward a conjecture of understanding the recourse of Economics for a Common Good of a Future Dystopic World from a particular lens. That lense according to me is called a - "Psycho-Analytic" Lens. While, Jean Tirole in his book - "Economics for The Common Good" charts out a new recourse of Economics for a Common Good from the perspective of information or information theory, I will seek answers from a - "Psycho-Analytic" lens. 

Information theory of Economics tells and explains to us how inadequate, asymmetric, complete, incomplete, perfect and imperfect information finally leads to certain kinds of decisions. Those decisions decide how agents, consumers, government, regulators, and producers' function in an economy. Often information and biases related to information lead to outcomes which are sub-optimal in outcome. In most cases, biases of one form or the other exists in terms of decision-making because in a real world of complexity, information can be most of the times - inadequate, asymmetric, incomplete, and imperfect. Information in a real-world context is hardly adequate, perfect and complete for perfect decision-making for a rational outcome to realize a common good. So is it so that in such a situation, the common good is an illusion or myth. When the agents, consumers, government, regulators, and producers do not have a perfect set of information, the paradigm in which the recourse of Economics should work for a "Common Good" of a dystopic future is or should be ideally - "Psycho-Analytic". 

A world which is struggling with Geo-Political Tensions, War, Threats of Pervasive Nationalism, Public Health Pandemics, Endemics, Conflicts, Lack of Peace, Identity Destruction, Prevalence of Intolerance, Terrorism, Subjugation of Human and Civil Rights, Lack of Privacy, Trust with a command economy where everyone in the society is a commodity, it is imperative to rely upon a Psycho-Analytic Definition of Economics for a Common Good in Future.

Such a Psycho-Analytic Definition of Economics will therefore understand the importance and need for competition for states while it will also understand the critical presence of regulation in the presence of markets. This will be because at the core of such an understanding, it will try to solve challenges of Climate Disasters, Market Takeovers, and Predatory Information Capitalism of Technology with Society being a consumer identity on a digital platform being controlled by algorithms. 

Hence, such an approach will place Human Rights and Justice too at the centre point of all challenges of the future and try to solve it for global common good at the backdrop of a dystopic future. Primarily it will be a Psycho-Analytic approach within the new recourse of Economics because it will have the heartlessness of empirical science on one hand and will also have the art of soul, faith and religion. Art of faith, religion will be mixed with Empirical Science within such a Psycho-Analytic approach of the new recourse of Economics for addressing a Common Good for the future. Human relations, human narratives, reflection of human memories, storytelling of human narratives and their interrelationships with and within the society along with the well-being of the Earth, Species, Nature and Humanity will be an essential component of such a Psycho-Analytic Definition of Economics. Since, human relations, narratives, reflections and memories will be a key part of the new Psycho-Analytic Definition of Economics, the importance of verbal and nonverbal language which measures the value of human, plant and animal life on Earth will also become very important as a part of Psycho-Analytic Definition of Economics for a Common Good in Future.  To illustrate, for instance, the global value chain of consumers is already hooked on Amazon for their purchase decisions. The pandemic has made consumers more reliant on Amazon in terms of their purchase decisions regarding any product. Often it can be seen that either the information is complete, incomplete or sometimes it is too much with a large variety of products. In such a situation, consumers can or might fall into the trap of not buying anything online by waiting for another better product because of the huge supply line of products in the Amazon platform. It might also happen that it can also trigger excessive buying of consumers in terms of true and complete information of huge supply lines of products in the online platform. But the question is whether the information about the product is authentic or whether when the consumer decision-making is happening whether uses of rights, ethical valuation of products and their associated impacts on society, ecology and environment is done or not by each consumer. Such a decision-making will be responsible, but it will only happen when each consumer is behaving with a "Psycho-Analytical" viewpoint rather than with an economic and strategic impulsion. It is over here that the role of regulators to implement such a - "Psycho-Analytical" decision-making becomes more important to motivating consumers towards an attitude of "Psychoanalysis" while making consumer decisions.

A similar notion is applicable also to what we are viewing in a post-pandemic situation in all OTT platforms as our entertainment consumption. It is imperative to push for a "Psycho-Analytical" viewpoint while making consumption decisions even for OTT platforms are made in terms of what we are viewing at the present and will view in future. With a plethora of supply of OTT content with a wide range of Psycho-Analytical narratives and impact on society, the imposition of a regulator for OTT content consumption is gradually becoming a necessity. Such a necessity will gradually spill over in most of the purchase and consumption decisions of society for the future with a dynamic and changing World Order. 

The World Order facing the decline of the European Union, Labour Unions, Rise of A New G20 Order, the Rise of A Dragon Growing Developed Country Recessions, Collapse of Institutions with the aggression of new technologies will need this new Economics which will or can only survive if - "Psycho-Analysis" becomes an integral component of such a new definition of Economics. Only then will it be able to ensure a common good for the future. Complete information can only emerge when the Psycho-Analytic definition of New Recourse of Economics of a Futuristic Common Good in a dystopic future is working perfectly with the Art of Faith, Religion, Soul and Objectivity of Empirical Science. In the absence of any one of them, the new recourse will inevitably fail and the World Order will only move towards a larger degree of dystopia.

Anandajit Goswami, Professor, Department of Social and Political Studies and Director, Faculty of Behavioural and Social Science (FBSS), Manav Rachna International Institute of Research and Studies (MRIIRS), Faridabad, Haryana, director.fbss@mriu.edu.in.  Views ar authors own. Usual disclaimers apply.  This article is excerpted from https://geekonomistdiary.blogspot.com/2022/12/what-will-recourse-of-economics-for.html