Commodity trading and inflation: ground reality in India using bivariate GARCH models

Abstract

Purpose

The nexus of commodity prices with inflation is one of the main concerns for a nation's economy like India. The literature does not have enough volatility-based study, especially using the multivariate GRACH family of models to find a link between these two. It is the main reason for the conduct of this study. This paper aims to estimate the volatility effects of commodity prices on inflation.

Design/methodology/approach

For ten years (2011–2022), future prices of selected seven agriculture commodities and inflation indices (wholesale price index [WPI] and consumer price index [CPI]) are gathered every month. BEKK GARCH model (BGM) and DCC GARCH model (DGM) are employed to determine the volatility effect of commodity prices (CPs) on inflation.

Findings

The authors find that volatility's short-term (shock) impact on agricultural CPs to inflation does not exist. However, the long-term volatility spillover effect (VSE) is significant from commodities to inflation.

Practical implications

The study's findings have a significant implication for the policymakers to take a long-term view on inflation management regarding commodity prices. The findings can facilitate policy on the choice of commodities and the flexibility of their trading on the commodities derivatives market.

Originality/value

The findings of the study are unique. The authors do not observe any study on the volatility effect of agri-commodities (agricultural commodities) prices on inflation in India. This paper applies advanced techniques to provide novel and reliable evidence. Hence, this research is believed to contribute significantly to the knowledge body through its novel evidence and advanced approach.

Citation

Rastogi, S. and Kanoujiya, J. (2023), "Commodity trading and inflation: ground reality in India using bivariate GARCH models", Journal of Economic and Administrative Sciences, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JEAS-09-2022-0220