Vulnerability of Emerging Market Economies to Exogenous Shocks

The transmission of global demand, oil supply and monetary policy shocks on the Indian economy are empirically examined using a parsimonious structural vector autoregression model for the period 1996 to 2016. Global demand shocks exert the most dominant effect causing fluctuations in various macroeconomic variables, whereas global monetary policy spillovers play an important role in affecting domestic short-term interest rates and financial asset prices. Global oil supply shocks, given its relative weightage as an intermediate input, have a greater impact on wholesale price index inflation than on consumer price index inflation. Given the rising trade and financial integration of the Indian economy, a quantitative impact analysis of these global shocks assumes importance for macroeconomic and monetary policy frameworks.

(Annexure tables and graphs accompanying this article are published on the EPW website, along with the text of this article.)

The views expressed in the paper are solely of the authors and do not represent the views of their organisation. This is an extension of the preliminary research work undertaken during Bhupal Singh’s secondment period at the Bank of England, London during 2008–09. Authors would like to gratefully acknowledge the comments and suggestions offered by the anonymous referee.