The Russia-Ukraine Crisis Will Not Affect India Directly - TopForex.Trade

The Russia-Ukraine Crisis Will Not Affect India Directly

The conflict between Russia and Ukraine is still raging, and the uncertainty surrounding the crisis has sent world markets tumbling.

The Russia-Ukraine Crisis Will Not Affect India Directly

The upheaval has had a major influence on the global economy, with stock markets and currencies plummeting, gold prices soaring, and crude oil prices hitting their highest level since 2014. Furthermore, the increase in crude oil prices has thrown India’s economy into chaos, as higher crude prices have a negative influence on inflation and the current account deficit (CAD).

However, according to a Bank of Baroda Economics Research paper released on February 25, 2022, the Russia-Ukraine crisis will have no direct influence on bilateral trade, but the rise in oil prices as a result of the situation poses significant dangers to the Indian economy. Higher oil prices put external stability and currency movement in jeopardy.

According to the paper, “Higher oil prices are likely to be one of the economic consequences of the Russia-Ukraine issue. Given India’s massive oil consumption, much of which is imported, increasing oil prices are likely to have an impact not just on the trade deficit and currency, but also on inflation and the fiscal situation. It’s worth noting that the Union Budget and the Reserve Bank of India’s monetary policy announcements were made well before the crisis and did not account for the impact of the crude price shock. As a result, both the Budget and the RBI used a conservative projection of crude prices of US$ 75/bbl, which will be a challenge in the future.”


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According to a Bank of Baroda Economics Research, India imports more than 80% of its total oil requirements and is the world’s third-largest crude oil importer. India’s oil imports totaled $82.7 billion in FY21. Oil imports increased to US$ 125.5 billion in FYTD22 (April 21-January 22), owing to a combination of economic recovery and increasing oil prices. Oil imports are anticipated to increase now that oil prices are at an eight-year high.

“Oil imports are anticipated to rise by US$ 15 billion, or 0.4% of GDP, for every ten percent increase in oil prices on a permanent basis, according to our estimates. The current account deficit will rise as a result of this. On the plus side, India exports some refinery products and stands to gain from increased oil prices. This will almost certainly mitigate some negative effects on imports.”

According to the BoB report, “Higher oil prices have put pressure on the rupee. Higher oil prices result in a growing trade deficit, which has a negative influence on external stability. Currency devaluation resulted as a result of this. When word of Russia’s offensive in Ukraine leaked on February 24, 2022, oil prices rose by 2.3%. Simultaneously, the INR dropped by 1.4%, the most in a single day since April 21. The INR is anticipated to continue volatile as the war’s future trajectory is unpredictable. As a result, the RBI may hold more USD/INR buy/sell swap auctions to moderate FX market volatility. Given the high level of crude prices, we expect the INR to stay under pressure and trade in the 75-77/$ band in the short future.”

India’s exports to Russia totaled US$ 2.7 billion, accounting for 0.9% of the country’s overall exports. Pharmaceuticals and electrical machinery are the most common examples. India imported US$ 5.5 billion from Russia, accounting for 1.4% of total imports. Petroleum products account for half of India’s Russian imports, and they can readily be substituted in other markets. As a result, there is unlikely to be a big impact on India’s bilateral trade with Russia.

According to the assessment. According to the BoB report, the fiscal impact should be considered: “The budgetary response to the price of crude oil must be continuously monitored. As previously indicated, the government’s Budget assumes oil prices of $75 per barrel. Notably, the government’s subsidy expense for FY22 and FY23 has been drastically reduced. Subsidies on petroleum goods were also reduced as a result of this. Furthermore, in November of this year, the government reduced excise duty on petrol and diesel by Rs 5 per liter and Rs 10 per liter, respectively. The fiscal space for increases in subsidies or excise duty is restricted because the government is on a tight path of fiscal consolidation and already has a high borrowing program.”


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