Despite the neutral political stance maintained by India and only a limited dependence on Russia-Ukraine for imports (2.1%) and exports (1%), their conflict is affecting India’s GDP growth. Here are some impact of invasion on Bharat explained in detail.
As global crude oil prices have skyrocketed due to the conflict , India’s macro-stability is at risk , and GDP forecasts have been lowered to 7.9% for 2023 by Morgan Stanley. This in turn, is expected to rock the banking and financial services along with share market.
Rising Inflation After Invasion
According to RBI, inflation in FY2022-23 is expected to be 4.5% , although the current inflation rate is 7% approximately. In addition, the rise in consumer inflation can arrest discretionary consumer spending and investments. This is further expected to cause an increased current account deficit, which will weaken the value of rupee in comparison to the dollar.
Increasing Interest Rate Post Invasion
The RBI will revise the interest rate for banks to protect the weakening rupee. As a result, both secured and unsecured credit like home loans, auto loans, personal loans, etc. will become expensive. At the same time, the rate of return on products like fixed and recurring deposits will improve , encouraging consumers to spend less and save more.
As of December 2021, India’s exports to Russia stood at Rs 27.114 billion, as per data from the Reserve Bank of India (RBI). This was the highest export trade amount in 30 years (2022-1992).
As the news of war broke, Indian rupee continued to depreciate.
A depreciated rupee helps exporters in the short term as they earn more money (rupees) for the goods exported. But this holds true for those exporters too who do not import any raw material for production. For instance, car manufacturing companies such as Maruti and Mahindra import some electronics parts from other countries (like computer chips from Taiwan), manufacture the car in India and then export it to other countries. But software-exporting companies (TCS, Infosys, etc.) do not need to import anything for rendering services. So, while some exporters may gain from the rupee depreciating, others stand to lose.
Indian importers will now have to pay more money for the same amount of goods and services. According to data from the Oil Ministry, the oil import bill for the April-December 2022 period surged by 99 per cent to $94.3 billion, as per various media sources. Now, this oil import bill is to be paid in US Dollars but since the rupee has depreciated so much against the US Dollar, paying the same bill will mean more money in rupee terms.
Russia & Ukraine, both are one of the major grain producers & exporters around the globe, and due to this conflict, exports relating to such commodities are being halted & there is a potential vacuum in the market.
As the conflict broke out, Sensex crashed by 2700 points due to panic selling, nervousness amongst the investors leading to Rs. 7.5 lakh crores being wiped off from the stock market. The Russian stock market nose-dived by 50% which in turn had a significant impact on all the Asian stock markets.
Russia is the one of the largest crude oil producers in the world & due to the sanctions imposed by the US on Russia, crude oil prices are expected to rise further due to the ongoing tensions. The sanctions may also lead to an increase in the crude oil prices, and it has already crossed the $100 per barrel mark ($108 as on 5th May, 2022), which is highest since 14 years & its price was already up by 45% in the first 6 months of 2021(was rallying to $80 per barrel)
Gold prices also spiked to $2000 per ounces. During the conflict, the equity market became volatile, so many of the investors shifted from equity & other investments to gold investments as gold is considered as a safe haven during such situations. Such market sentiments were also one of the factors which lead to an increase in the gold prices & fall in the equity & other markets.
On 30th March 22, Russia has also decided to peg the Russian ruble with gold, where 1 gram of gold = 5000 rubles till 30th June 2022. So, because of this, Russian ruble has already gained its lost valuation back & there is a good possibility that it’s valuation may even increase further.
Russia is 3rd largest gold supplier in the world & it may be able to increase its gold supply easily.
There is also a potential availability of benefit to the mustard Oil growers in Rajasthan & Uttar Pradesh, who are set to market their crops in the coming weeks. At present the Mustard prices are ruling above Rs. 6,500 per quintal which is above minimum support price of Rs. 5,050 per quintal. Cotton prices are also elevated because synthetic fibre is getting costlier. Brent crude oil is one the largest factor for uplifting prices of the above-mentioned commodities as well as other commodities. India must carefully observe & analyse the current scenario, and act accordingly, so that there may be a potential possibility of favourable outcome in many such areas from this ongoing conflict.
During this conflict, US & its many ally-based organizations decided to terminate their operations in Russia. SWIFT (Society For Worldwide Interbank Financial Telecommunications) is an International organization which is connected with more than 200 countries & 11000+ banks worldwide, handled more than 4 crore transaction in a single day, decided to cut ties with Russia.
There is a vacuum due to this situation, and it can be filled by India’s own UPI (Unified Payments Interface). UPI usage has grown considerably in the past few years, and UPI has even developed to an extent where digital payments can be made even without internet. UPI in financial year 21-22, crossed $1 Trillion mark in transactions If UPI is able to fill such vacuum it shall be a great leap for India in the finance sector by UPI being the vacuum filler & replacing SWIFT in Russian market.
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