The Indian Rupee weakened 1.6% yesterday as Russia announced war on Ukraine. Brent Crude rose to $105.7 per barrel following the news and Natural Gas to $5. India imports both these and Russia is one of the biggest suppliers of both Crude and Natural Gas. The spike in the aforementioned commodities caused a spike in inflation worries in India. Thanks to the ongoing elections in 5 states, fuel prices in India have stayed stagnant for almost 4 to 5 months now. However, people are expecting a sharp rise in fuel prices post March 07, when polling ends in the 5 states. India's wholesale price index has been reporting double-digit increases for many months now. A weakening currency and rising prices of commodities that make up for the bulk of India's imports will make matters worse for India's corporates and India's current account deficit.
The US and its western allies have been pushing Russia for years now by expanding Nato. Ukraine was also being shown the carrot of Nato membership and before anything could happen, Russia took matters into its own hands. Even now, there is very little chance that Nato will come forward with military help for Ukraine. Everyone wants to sell arms but no one wants to fight a war.
A new report by Nomura says that India will be one of the worst-hit countries in Asia because of this crisis. Source The increase in inflation will impact India's economic growth. India's central bank wanted to stay accommodative to spur growth but recent actions may prompt the central bank to start looking at rate hikes and that too can dent growth. A 10% hike in crude oil will increase WPI by 1.2% and remove 0.2% from GDP growth, as per economists.
Rising input costs from fuel and lower rupee will make way into other assets as well. Inflation impacts everything. While the rest of Europe may face issues of natural gas shortages, and grain shortages, a rise in global prices should also impact food grain prices in India.
Russia is also a major low-cost exporter of nearly every kind of fertilizer.
The charts above already paint a scary picture of what is to come if the crisis in Ukraine sustains for a longer period of time. While India may be watching the events unfolding in Ukraine with hawkish eyes, there is very little it can do to provide short-term relief to consumers. Consumers should certainly brace themselves for tough times ahead as far as inflation in concerned.
Posted Using LeoFinance Beta