Dynamic co‐movements across forex, gold, crude oil and Indian equity market

• Published date: 01 February 2022
• Author: Neeraj Nautiyal
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2320

ACADEMIC PAPER

Dynamic co-movements across forex, gold, crude oil

and Indian equity market

Neeraj Nautiyal

School of Management, Graphic Era Hill

University, Bhimtal, Uttarakhand, India

Correspondence

Neeraj Nautiyal, School of Management,

Graphic Era Hill University, Bhimtal,

Uttarakhand, India.

Email: nnautiyal@gehu.ac.in

The research seeks to assess whether the Indian capital market is following a sustain-

able equilibrium relationship with gold, oil and currency exchange in long and short

intervals or not. The study uses autoregressive distributed lag (ARDL)-unrestricted

error correction model (UECM) Bounds test over 25 years from 1990 to 2016. The

result indicates that equity indices are cointegrated and has a relationship for a long

run with gold and currency exchange. Volatility in gold prices and currency exchange

affects equity performance for a long and short interval of time. Only oil price move-

ments affect the currency exchange rate in long-run. No other variable makes any

impact on it in short-run. The outcome supports gold that appeared as an alternative

investment asset class in the investors' community. The report features the necessity

to structure policies so that currency exchange gestures and financial return volatility

can be monitored and controlled with gold and oil prices as instruments.

1|INTRODUCTION

In recent times, Indian markets have undergone significant uncer-

tainty, either in financial markets or commodity markets. Foreign cur-

rency markets are reflecting a persistent decline in rupee value

against US dollar, followed by high movements in crude, gold prices,

and equity returns. When it comes to lead the market these variables

are critical. Commodities price movements have a pervasive impact

on all economic and financial movements along with all segments of

the global economy. All the movements of market integration in the

financial world are also visible in the commodity market with the most

traded metals gold and oil. Gold and oil are the most common among

the active traded commodities (Yaha, Tumala, & Udomboso, 2016).

Gold serves as a best preserving purchasing power over a long period

due to its high liquidity; a hedge against inflation; owing to its favor-

able correlation (Bampinas & Panagiotidis, 2015), a source of wealth,

derivative valuation, and so forth (Gaur & Bansal, 2010;

Yahyazadehfar & Babaie, 2012). In addition, crude as a principal indi-

cator of development in currency exchange around the globe

(Amano & Van Norden, 1998). In the worse scenario gold can hold its

purchasing power during high inflationary period (Goodman, 1956).

The weak association between gold and other asset class also enables

it a portfolio diversification instrument (Ciner, Gurdgiev, &

Lucey, 2013). Traditionally also, an inverse movement in gold prices

against equity has been noticed. In addition, tracing gold price fluctua-

tions is economically and financially both interesting and important.

Often when US dollar devalues against any other prominent currency,

investors may prefer to park money towards gold as a refuge (Capie,

Mills, & Wood, 2005; Joy, 2011), thus forcing prices of gold to go up

(Reboredo, 2012). This is crucial for emerging economies such as India

where the Gold Import Bill accounts for 10% of total imports (India

ranked second largest consumer in the world in 2016).

High imports of oil and related products remain another principal

concern for India. After the Unites States, China and Japan in 2013,

India was the third largest oil importer and consumer. The huge gap

(with a demand of 3.72 million barrels and production of 900 bar-

rels each day) between the demand and indigenous production results

in US dollar outflow which further deteriorate current account bal-

ance. This relationship becomes more sensitive, particularly in an

economy that imports oil such as India, as oil price movement contrib-

utes to rupee depreciation in the international market and hence high

inflationary pressure on the economy (Raj, Dhal, & Jain, 2008). The

traditional price increase in crude prices also led to a rise in gold price,

inflation and a decline in stock profits (Gokmenoglu &

Fazlollahi, 2015). The synchronized causality of equity and oil market

mechanism that was disrupted after 2007–2008 financial turmoil has

strengthened. Since crude oil prices fluctuate considerably, vagueness

may exist across all segments of the oil importing and exporting

Received: 19 April 2020 Revised: 11 June 2020 Accepted: 19 July 2020

DOI: 10.1002/pa.2320

J Public Affairs. 2022;22:e2320. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of9

https://doi.org/10.1002/pa.2320