INTERPLAY OF CAPITAL MARKET SENTIMENT AND OIL PRICE: EXPLORING THE CAUSALITY BETWEEN STOCK MARKET INDEX AND CRUDE OIL PRICE

Fluctuations in crude oil price trigger speculation that is reflected in the volatility of the stock market. The study sought to explore the association between crude oil price and the sensitive index of Bombay Stock Exchange for the period April 2000 to August 2019. The findings of the Johansen Cointegration test showed no long-run association between the two variables that are integrated of order one I (1). In the short run Sensex exerted a significant positive impact on crude oil price without any feedback effect as evident in the results of the Vector Autoregression model. The study argues that the impact of crude oil price on Sensex might be transmitted indirectly through other macroeconomic variables such as exchange rate and inflation. Consistent with the regression results, the Granger causality test revealed that Sensex Granger cause crude oil prices but there is no evidence of causal impact of crude oil price on Sensex. The impulse response function indicated that crude oil price, in the short run up to third period responds positively to standard deviation in the Sensex. The influence of the sensitive index on crude oil prices is sought to be rationalized in terms of demand shock in the global oil market due to expansion of the primary oil importing economies including India