Oil prices and trade balance: A wavelet based analysis for India

The study examinations lead-lag relationship between real oil price (ROP) and real trade balance (RTB) for India using monthly data and covering period from January 1980 to December 2011. To in depth examine the issue, study decomposes the time-frequency relationship between ROP and RTB utilising continuous wavelet approach. Result of the Rua's (2010) measure of wavelet cohesion show that there was high degree of positive correlation in the 0.25-0.5 years-scale corresponding to 1983-1984 and 1986-1989; and in the 0.75-2 years-scale corresponding to 2008-2010. However, evidence of high negative correlation was found in 0.5-1 years-scale corresponding to 1987-1990, 1994-1996 and 2001-2005 and evidence of strong negative correlation was found in 1.75-2.25 years-scale corresponding to 1990-1997. Further, results of wavelet coherence analysis show that in the significant region of coherency and corresponding year-scales, real oil price was leading over India's trade balance indicating that an increase in the oil price will increase India's trade balance. These results corroborate the findings in Le and Chang (2013) and contrary to the findings in Hassan and Zaman (2012).