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There is no end in sight for the Ukraine war. At the time of writing, the FT reports that Ukraine has rejected a Russian deadline to surrender control of Mariupol which is under heavy attack.
The uncertainties around the war combined with Chinese restrictions as the country tries to contain COVID-19 have made the risks of stagflation all too real.
At the end of last week, the OECD said that the crisis will shave one percentage point off global growth this year and add to inflation by 250 basis points. It has called for targeted spending by governments while central banks go about their task of normalising monetary policy post the pandemic.
The war is expected to hit Europe the hardest, given that it has the closest trade ties with Ukraine. But commodity importers are not going to be spared as well.
Thus, for example, while crude oil prices had eased from the near $130 a barrel a few days ago to around $100, they have again climbed back to approximately $110. This is a far cry from around $75-80 a barrel estimate that underpins the central government budget.
This inflation will dampen the recovery, especially consumption which is anyway weak, to begin with. If the government were to intercede by cutting excise taxes, for example, that would hit its revenue collections. That’s not all, the subsidy bill for fertilisers is rising too, putting pressure on the fiscal deficit.
Higher oil prices would also push up the current account deficit, making it more difficult for the RBI to manage the rupee. Besides, it will lead to imported inflation at a time when retail inflation is already above 6 percent. The supply disruptions owing to the Chinese shutdown will also add to inflationary pressures.
It is tough being a policymaker at this juncture. As today’s FT pick (free to read for Pro subscribers) says: “No one is confident they know how these policy responses, drawn up in haste to the fast-changing economic reality, will work. All most economists are willing to say is that the global outlook in 2022 will be worse than they previously expected and how bad depends on the war.”
Investing insights from our research team
Opportunity for Indian chemical industry as Europe struggles
PVR: Signs of recovery loud and clear
ION Exchange: Time to seize the opportunity as growth resumes, valuation shapes up
What else are we reading?
The Eastern Window: What next as India, China resist US pressure on Ukraine?
Ruchi Soya: Making sense of its follow-on offer’s discounted price
Go long on electric vehicle battery storage
Ukraine war takes its toll on airlines
IndusInd Bank has a few bumps ahead before a smooth ride
Chinese market rally disguises concerns over deglobalisation (republished from the FT)
Technical Picks: USD-INR, Hindalco, United Spirits, DLF, Hero MotoCorp and Crude oil (These are published every trading day before markets open and can be read on the app)
Ravi Krishnan
Moneycontrol Pro
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