India has reported inflation at a 17-month high of 6.95%, the US inflation rate hit the 8.5% mark, a four-decade high, and in the UK, the inflation rate surged to a three-decade high of 6.2% in March 2022. With such high inflation rates, central banks are expected to continue more aggressive interest rate hikes in order to control rising prices, a move that could also prompt more market sell-offs, and making loans and economic activities more expensive.
Post pandemic world was surely not ready for Russia-Ukraine crisis. Oil prices crossed $100 a barrel in few days since crisis started unfolding and jumped to even $139 a barrel at one point, the highest level for almost 14 years, while wholesale gas prices for next-day delivery more than doubled. Such a massive surge in energy-prices is sure to negatively affect the global economy as Russia, the world’s third largest producer and exporter of oil after USA and S.Arabia meets 10% of global demand. The European continent is most vulnerable as Russia caters to around 27% of oil and around 40 % of the natural gas needs of the region. Germany which has abandoned nuclear power and relies heavily on Russian gas, has great stakes.
Russia is also a good supplier of grains, vegetable oils and industrial resources such as iron and steel, other metals, machinary and equipment, chemical products, food stuff and agri products, besides being world’s largest exporter of wheat, sixth largest exporter of gold, etc. Trade interruptions and sanctions have meant higher prices for all such products, a development that is further stoking food inflation backed with already disrupted global supply chains of the post-COVID world.
The embargoes and sanctions imposed on Russia by the US, EU and other Western Nations are already showing effects. The move by US, UK, Canada and EU to cut off several Russian Banks from the SWIFT Payments System, is particularly very punitive. Similar step has been taken against Iran and North Korea in the past but the impact registered had not been huge because of the limits of these economies.
Though Russia accounts for a small percentage of India’s total trade, the other sectors that have connections with Russian Firms may get hugely impacted. With Russian banks excluded from SWIFT system, those Indian entities trading with Russian firms will have to face added tensions about future payments and outstanding bills.
India has to strategise as to how to control rising crude prices. In such cases the government is met with two choices i.e. It can either pass on the brunt to consumers or has to let it affect India’s Current Account Deficit (CAD). An RBI study shows that a $10 per barrel increase in oil prices results in an additional deficit of $12.5 billion or Rs. 94,750 crore. It also has about a 24 basis direct impact on retail inflation measured by CPI. This calculation makes the above-mention choice a tough call.
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