The ongoing conflict between Russia and Ukraine has sent global markets into a frenzy. And just as countries and central banks were recovering from the impact of the COVID-19 pandemic, the geopolitical tensions are likely to further aggravate inflationary pressures, and a Nomura report suggests that in Asia, India is likely to be among the worst losers as a result of this conflict.
Brent crude climbed around 3% after surging above $105 per barrel at one point in Thursday’s trade. The report by the research firm, authored by Aurodeep Nandi and Sonal Varma, notes that the sustained rise in oil and food prices is likely to have an adverse impact on Asia’s economies, manifested through higher inflation, weaker current account and fiscal balances, and a squeeze on economic growth.
"In such a scenario, India, Thailand, and the Philippines are the biggest losers, while Indonesia would be a relative beneficiary," the report says.
Given its status as a net oil importer, India is also likely to be adversely impacted by rising oil prices. "Rising crude oil prices are a negative terms-of-trade shock for consumers and businesses, and we estimate every 10% increase in oil prices would shave off 0.20pp from GDP growth, "the report reads.
While the Monetary Policy Committee in India did opt to continue with its accommodative stance in the latest policy meeting, expectations were that the Reserve Bank of India would soon adopt a hawkish perspective with inflation having crossed the upper limit of its tolerance band in the latest reading. At the meeting, RBI Governor Shaktikanta Das said that inflation is expected to average 4.5% in FY23. Nomura argues that even in the absence of the current geopolitical tensions, this grossly underestimates the upside risks to inflation over the coming months.We believe higher crude oil and food prices are likely to further frustrate the RBI’s inflation outlook and necessitate a hawkish pivot in the middle of the year, in acknowledgment of these upside risks. Nomura said in its report that it "maintains our outlook for 100 bps of policy repo rate hikes in 2022, starting in June." As per QuantEco Research, a rally of $10 per barrel in India's crude basket could shave off 10 bps from the annual GDP growth estimate-pegged at 9.2% for FY22. A permanent increase of 10% will cause inflation of 1.2% in WPI and 0.3-0.4% in CPI, noted Bank of Baroda chief economist Madan Sabnavis.It may be noted that in the minutes of the latest MPC meeting released on Thursday, RBI Governor Das said that the renewed surge in international crude oil prices will require close monitoring. The Governor is noted as saying, "We need to remain watchful of the risks to domestic inflation arising from the rise in international commodity prices due to exogenous factors, including geopolitical developments," The meeting was conducted between February 8-10, 2022, in which the committee chose to continue with its accommodative policy at record low interest rates.