- Rupee to further depreciate against US dollar
- Soaring commodity prices to push inflation up
- Indian banking sector will likely remain resilient
The ongoing Russia-Ukraine war will have a negative impact on India’s exports and spike in oil prices will cause ripple effects on input prices and consumer goods leading to inflationary pressures. Against this backdrop, GlobalData, a leading data and analytics company, revises down the country’s economy growth forecast by 0.1 percentage point to 7.8% for 2022 in March 2022.
Current account deficit to widen
Gargi Rao, Economic Research Analyst at GlobalData, comments: “In the short-term, Indian traders may feel the pinch of higher oil and gas prices along with delays in shipment and movement of assignments across Black Sea. Inflation rate is already on the rise due to increase in prices of fuel and edible oils. GlobalData forecasts the ongoing geopolitical risks arising from the Russia-Ukraine war to further push the inflation rate to 5.5% in 2022 compared to 5.1% in 2021.
“Rise in commodity prices will add to the current account deficit, tighten financial conditions and lead to a possible depreciation of rupee against the US dollar. Investment climate might deteriorate. Shock to stock markets will further lead to decline in capital inflows.”
Import bill expected to inflate
Ukraine and Russia together accounted for 2.2% share of total imports of India in 2020. India mainly imports mineral fuels (34% of the total imports), natural pearls & semi-precious stones (14%), fertilizers (10%), petroleum oils & crude (5.6%) from Russia and animal or vegetable fat and oils (74.9% of the total imports), fertilizers (11%), and inorganic chemicals (3.5%) from Ukraine. The prices of these items are projected to shoot up in the short-term.
Rao continues: “Disruptions to supply cause prices of intermediary goods such as pig iron to shoot up. India being the largest importer of sunflower oil, shipments of tons of cooking oil to India are at risk as logistics and loadings remain stuck at various ports. As a result, the country may face the prospect of increased prices of edible oils. Moreover, due to rise in crude oil prices, Indian import bill is expected to inflate.”
The diamond polishing business in India may be among the sectors most affected by Indian banks’ decision to temporarily freeze fresh transactions with Russian institutions. Farm exporters might take a hit due to port congestion. Many defence projects are likely to get delayed in Russia thereby affecting the defence manufacturers in India.
Banking sector likely to remain resilient
However, on the positive side, with higher economic sanctions on Russia from the West, India can reap benefits from possible new export opportunities. Steel and aluminum manufacturers could gain by tapping the EU market. The overall Indian banking sector will likely remain resilient. However, there might be a possibility of monetary tightening amid the inflationary pressures.
Rao concludes: “There are upside risks to domestic inflation arising out of international commodity prices amid the ongoing conflict. Indian importers might feel the pinch of higher commodity prices and exporters may fail to reap benefits due to high logistics costs.”
