The combative advent of the Russian military into Ukraine early Thursday has predictably spooked markets across all asset classes the world over. Oil prices surged to an eight-year high of around $105 a barrel, stock markets tumbled with the Indian bourses crashing nearly 5% on Thursday and the rupee dipping perilously close to the 76 to a dollar mark. The flight to safety amid all this mayhem propped up India’s favourite yellow metal to a 15-month high. Domestic stock indices that have already been witnessing tumultuous swings in recent weeks as global inflation flared up and the US Federal Reserve signalled faster throttling of ‘easy money’ liquidity, did pare some of these initial losses on Friday. But multi-layered uncertainty will keep investor nerves on edge, as will the diplomatic fallout of how the UNSC decides to tackle Russia in its vote, with the western world seeking strict condemnation and sanctions, while India has thus far preferred not to take a side. There could be double-edged economic ramifications for those sitting on the fence if the extent of sanctions against Russia are intensified. This could deter Indian interests, be it in terms of trade financing, investment flows and even banking transfers as calls to bar Moscow from the SWIFT global payment network grow louder. For now, Russia’s oil exports have not been explicitly targeted yet.
India’s imports of petroleum products from Russia are only a fraction of its total oil import bill and thus, replaceable. But getting alternative sources for fertilizers and sunflower oil may not be as easy. Exports to Russia account for less than 1% of India’s total exports; pharmaceuticals and tea could face some challenges, as will shipments to CIS countries. Freight rate hikes could make overall exports less competitive too, but it is the indirect impact on the trade account that is more worrying. The surge in crude oil prices will drum up India’s inelastic oil import bill, and gold imports could jump back up and keep the rupee under pressure. Trade and current account deficits may be jeopardised, although forex reserves are healthy. The biggest concern, for India, however, remains the impact of oil prices on inflation, and the unravelling of the Budget math which hinges on average oil prices of $75 a barrel. The RBI’s assertion that retail inflation had peaked at 6.01% in January, as well as its growth-accommodative stance may need a rethink with oil prices 11% higher since its February 10 monetary policy review. On the fiscal side, the Government, which has been conservative in its revenue assumptions in the Budget, has the room to pre-emptively cut domestic fuel taxes to nip inflationary expectations, stoke faltering consumption levels and sustain India’s fragile post-COVID-19 recovery through this global churn.