Conflicts between Russia and Ukraine are still boiling and global markets have been weighed down by uncertainties surrounding the crisis. The turmoil had a significant global economic impact, with stock markets and currencies plummeting, gold prices rising and crude oil prices hitting their highest level since 2014. And rising oil prices crude has thrown the Indian economy into disarray since the surge in crude prices. have a negative impact on inflation and the current account deficit (CAD).
However, according to the Bank of Baroda Economics Research report published on February 25, 2022, there will be no direct impact of the Russian-Ukrainian crisis on India in terms of bilateral trade, but the surge in the price of oil following the crisis poses considerable problems. risks for the Indian economy. Rising oil prices pose risks to external stability and currency fluctuations.
The report also states that “the economic impact of the Russian-Ukrainian crisis will likely be through higher oil prices. Given that India is a large consumer of oil, much of which is imported, the impact of the rise in oil prices is likely to be visible not only on the trade deficit and the currency, but will also have an impact on inflation and the budgetary situation.It should be noted that the Union budget and the The RBI’s monetary policy announcement came well before this crisis and did not factor in the impact of the crude price shock, so RBI took a conservative crude price estimate of ~US$75/bbl , which will probably be a challenge in the future.”
According to the Bank of Baroda’s Economics Research report, India imports more than 80% of its total oil requirements and is the world’s third largest importer of crude oil. In FY21, India’s oil imports totaled $82.7 billion. In FY22 (April 21-January 22), oil imports increased to $125.5 billion, driven in part by the economic recovery and higher oil prices. However, with oil prices now hovering at their highest level in 8 years, oil imports are expected to be higher.
“We estimate that for every 10% increase in oil prices on a permanent basis, oil imports are expected to increase by $15 billion or 0.4% of GDP. This will translate into an increase in the current account deficit. On the positive side, India also exports some refinery products and is expected to benefit from higher oil prices.This will likely offset some of the negative impact on imports,” the BoB report said.
The BoB report also claims that “The Rupee has come under pressure due to rising oil prices. Rising oil prices are leading to a soaring trade deficit and hence have a negative impact on external stability. This led to a depreciation of the currency.On February 24, 2022, when the news of Russia’s offensive against Ukraine broke out, oil prices increased by 2.3%.At the same time, the INR rose depreciated by 1.4%, registering its largest single-day decline since April 21. With uncertainty over the future course of the war, the INR is likely to remain volatile. buy/sell USD/INR trade to manage volatility in the forex market. term.”
“Crude oil-related products weigh 7.3% in the WPI basket. Therefore, the direct impact of a 10% increase in oil prices is estimated to be around 0.7% on the WPI. Adding indirect impact, the overall effect may be around a 1% increase in WPI inflation,” the report said.
According to BoB’s Economist report “The impact on CPI inflation will be both direct and indirect. The first is the direct impact. Gasoline and related products have a weight of 2.4% in the CPI basket. However, the retail prices of petrol and diesel at the pumps also include excise duties, VAT, etc., which will remain unchanged. Even if the base rate of the gasoline/diesel increases by 5%, the actual impact on retail prices is estimated to be around 5%, therefore we estimate that the direct impact of a 10% increase in oil prices is only by about 0.15%.Higher oil prices will also ripple through supply chains and drive up the prices of other commodities and services. The indirect impact of this ripple effect is likely to be more high, around 0.25%-0.35%.”
“India’s exports to Russia amounted to $2.7 billion, or 0.9% of India’s total exports. These are mainly pharmaceuticals and electrical machinery. India’s imports from Russia amounted to $5.5 billion, or 1.4% of total imports. and can be easily replaced by other markets. Therefore, the impact on India’s bilateral trade with Russia is not expected to be significant,” the report said.
Given the fiscal impact, the BoB report states that “the fiscal response to the price of crude oil needs to be watched closely. Subsidy bill for FY 22 and 23. This also included the reduction of subsidies on petroleum products.Furthermore, it should be noted that the government had reduced the excise duty on petrol and diesel by Rs 5 /litre and Rs 10/litre respectively in November 2021. With the government walking the narrow path of fiscal consolidation and an already high borrowing programme, the fiscal room to increase subsidies or excise duties is limited.”
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Article first published: Monday, February 28, 2022, 12:58 p.m. [IST]