Russia-Ukraine crisis may raise retail inflation in India

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The impact of high oil prices amid the worsening of tensions between the countries Russia and Ukraine could hit Indian shores and that raising fuel inflation, the country’s oil import bill.

 India could face higher inflation for a long period unless the government sharply cuts taxes on petrol and diesel.

 India is a net importer of oil and buys very little oil, gas from Russia. It could be indirectly impacted if the West puts sanctions on Moscow the second-largest oil producer in the world.

Higher crude oil prices will keep CPI inflation higher for longer than obliging the reserve bank of India to raise rates more than the two hikes we expected in August to December 2022.

The government sharply cuts excise duties on petrol, diesel to contain fuel inflation. Transport forms about a fifth of the CPI basket for an average consumer, higher inflation in the form of fuel prices could pinch their pockets even more.

 Finance Minister explained on Tuesday rising crude oil prices amid Ukraine-Russia tensions pose a threat to India’s financial stability the government is keeping a watch on the situation.

Oil rose to nearly $100 a barrel on Tuesday and reaching its highest level since 2014. Moscow ordered troops into two breakaway regions in eastern Ukraine.

If the Russia-Ukraine crisis is resolved through diplomacy that short of war and the Brent crude price will likely fall to less than $70/bbl. In the second half of this year.

 India buys very little oil and gas from Russia partly because most Indian refineries cannot process the heavy crudes that Russia exports, due to transportation costs from Russia to India. 

In the near-term disruptions to the Indian economy will be minimal, but the main effect will be via the indirect impact on global oil prices that according to ICICI Securities. Russia accounts for 11% of global crude-oil exports.

 Sanctions take about 60% of this off global markets. World crude-oil supply would decline by 3mmbd, In the Brent crude price would likely shoot above US$110/bbl.

The brokerage also explained tithe possible revival of the Iran nuclear deal now at a crucial stage of negotiations and restore about half of this supply that adding about 1.5mmbd of production and exports within a few months.

 Even with the possible restoration of Iran as a major crude oil exporter that Brent would likely remain above US$100/bbl. for much of 2022.

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