Geopolitical risks arising from the Russian-Ukrainian conflict would increase the import bill for items such as mineral fuels and oils, gemstones and jewellery, edible oils and fertilizers, as India relies heavily on imports of these items , India Ratings and Research (Ind-Ra) said on Monday.
As a result, according to the rating agency, merchandise imports could cross $600 billion in FY22 (10MFY22: $492.9 billion).
The immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in the current account deficit and the depreciation of the rupee.
Ind-Ra’s analysis suggests that a $5/barrel (bbl) increase in crude oil prices will result in a $6.6 billion increase in the trade/current account deficit.
The ramifications of the Russian-Ukrainian conflict on the Indian economy will be felt via rising global commodity prices (crude oil is boiling, reaching $103.15 a barrel on February 27, 2022) as India is a net importer of raw materials, the agency said. .
Besides the Russian-Ukrainian conflict, Sri Lanka has recently faced difficulties due to a forex crisis. Although the crisis facing Sri Lanka is likely to have minimal macroeconomic impact, companies with business ties to Sri Lanka could be negatively impacted, he added.
Bilateral merchandise trade with Sri Lanka had peaked at $7.46 billion in FY2015, although it has since fallen to $4.42 billion in FY922 (FY21). $4.41 billion). Similarly, merchandise trade with Ukraine, which peaked at $3.11 billion in FY13, fell to $2.35 billion in FY922 (FY21: $2.59 billion).
However, India’s merchandise trade with Russia was a bit higher at $8bn-$11bn in fiscal years 2018-21 (9MFY22: $9.44bn).
While Sri Lanka’s share in India’s merchandise trade basket has fluctuated between 0.55% and 1.06% since FY2005, Ukraine’s share has been 0.24% at 0.42% since FY2005. Even Russia’s share fluctuated between 0.79% and 1.39% (9MFY22: 1.27%).
Overall, India maintained a merchandise trade surplus (i.e. exports net of imports) with Sri Lanka and a trade deficit with Ukraine and Russia in FY 2004 -21. In fiscal year 9MFY22, the trade surplus with Sri Lanka was $2.88 billion and the trade deficit with Ukraine and Russia was $1.60 billion and $4.34 billion , respectively.
The impact on inflation will be due to a combination of higher import prices and currency depreciation. The impact of a 10% increase in petroleum product prices without taking currency depreciation into account would be a 42 basis point increase in consumer price index (CPI) inflation and a 104 basis point increase in wholesale price index (WPI) inflation. The impact of a 10% increase in the price of sunflower oil without taking currency depreciation into account would be a 12.6 bp increase in CPI inflation and a 2.48 bp of WPI inflation.
A 10% increase in the price of these two commodities alone can push up retail and wholesale inflation by 55 basis points and 109 basis points, respectively, Ind-Ra said.
This will have a negative impact on domestic inflation, which has already challenged the Reserve Bank of India to pursue an accommodative monetary policy.
Since the government has already undertaken a sharp reduction in import duties on edible oil, the scope for further reduction without impacting fiscal arithmetic is limited, the agency said.
The Russian-Ukrainian conflict also has the potential to trigger capital flight from emerging markets to safety. This may cause the Indian Rupee to weaken. In addition, many other macro parameters such as inflation, fiscal deficit and public debt are quite high, but Ind-Ra believes that they are unlikely to trigger a rupee weakness similar to 2013 (type tantrum). The accumulation of foreign exchange reserves to the tune of $632.95 billion (as of February 18, 2022) should largely provide the much-needed cushion. However, high inflation and a weak currency are a perfect combination for interest rates to harden and with high public debt (higher than the 2013 crisis) this will certainly bring the issue of debt sustainability back to the table. front of the stage.
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