Russia-Ukraine war and India’s Business Implication

Robin Banerjee

28 Feb 2022

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The incursion ramifications could vary between negligible to extremely serious; depending upon the length of time the conflict will last. The international leadership is counting on sanctions from US and EU, which Russian politicians may have already factored in their thought processes.

The world is trying to put together various theories as to why this senseless invasion. And the most probable cause perhaps is Russian President Vladimir Putin's dream of enlarging his tentacles once again to the original Russian empire, by replacing the democratically elected Ukrainian government with his own cronies.

Unfortunately, the unwarranted Russian intimidation has shattered hopes of a strong global economic recovery from the disastrous pandemics, at least in the short term.

How could it affect the Indian economy?

Given the situation as of now, the following could be the major implications on us:

• Oil price hike is one big fear. Brent crude is already at nearly $100 a barrel (up from $80 in early January 2022). Financial Times predicts oil price could be $120-$140 a barrel, if the conflict sustains through the year.
• Inflation could be a big killer. With oil price rising and rupee weakening (leading to costlier imports), many commodity prices are expected to increase, including the transportation costs.
• Weakening rupee is a distinct possibility. Though not sharp depreciation of rupee is expected. RBI has a good forex war chest (total reserves $630 billion), which they could play with to isolate sudden fluctuations. Good for exports; importers keep covering (about 50 percent of your exposure).
• Cutting excise duty by the government on petrol and diesel to contain fuel led inflation, is a possibility. This may lead to government spending lesser on infrastructure to balance the receipts and expenditures, as the kitty cannot be expanded limitlessly, leading to lesser demand for steel, cement, etc.
• Interest rates could rise to control rampant inflation. This will put further pressure on cost of production.
• International logistics could get majorly affected. Sea and air routes could get uncertain and unsafe. If so, exports and imports will involve longer lead time. Stock outs of imported items (such as active pharmaceutical ingredients) cannot be ruled out.
• Base metal prices could be increasing. Possibility of smelter shutdown in Europe, and implications of sanctions on Russia - a major metal producer, could lead to not only shortages but also spiking prices.
• Consumer demand could shrink. Stock market is already down. Market sentiments could go negative due to horror stories which normally emerge during such periods. Which means, consumers spending less and saving more for possible dark days. Plus, we could hear China getting aggressive on its expansion ideas, which could add fuel to the fire of adverse sentiments.
• Speculative pricing to yo-yo. Gold could rise (it's already up from $1800 in Jan'22 to $1900 now); however crypto currency is in dumps (Bitcoin down from $48,000 in early Jan'22 to $39,000 now). Surely, crypto is not a hedge against tough-times, as some quarters tried to proclaim.

What to do?

Now the natural question is, what do we do? I suggest the following:

• India story is yet quite strong, with good company earnings announcement to continue. Hence, hold your breath and don't panic, even when you hear grisly stories on your TVs and through WhatsApp messages.
• Do not take any significant long-term position on pricing, as the fluctuations could be large;
• Assume the conflict will last between one and three months. Hence, it is unlikely to end soon (though hoping, it does not last beyond a fortnight);
• Keep away from speculative positions. If investing in shares, please keep picking in small lots on dips and follow the SIP model;
• Broach for inflationary pressures. Hence, savings is a good idea, and short term spending could be a bit deferred - though this is not good for the economy as a whole.
• Avoid global travel if possible, as the international air spaces may not be as safe as it used to be even a few days back.
• Last few words
• How I wish I could be a forecaster - a crystal-ball gazer. That being only possible in a movie, we need to be careful. Do not forget that the ongoing global conflict is not too far from our doors. Plus, China could just get more ambitious and push their agenda, leading to conflicts on India's borders.
• Prevention is better than cure, as they all say. Hence, keep your eyes and ears open, brace for some inflation and uncertain times, but India story looks yet to be rather intact not to give us sleepless nights.

Disclaimer: The views expressed are solely of the authors and MentorMyBoard does not necessarily subscribe to it. MentorMyBoard shall not be responsible for any damage caused to any person/ organization directly or indirectly.