Wars always lay a detrimental impact on life and economies. The impact of the ongoing Russia- Ukraine war on both countries and global markets has not been any different. The conflict triggered a significant collapse and halted the unending bull run in the markets worldwide. But the biggest question of the hour remains- Will Indian markets be affected in the short and long term? The answer to that is yes! How? Let’s find out!
The impact of the war starting was such that the Nifty 50 corrected by more than 4.5% on 24th Feb. Since then, Indian markets have been in chaos and turmoil like global markets. The shock waves of this conflict were such that the benchmark declined by 7% in a couple of days.
Background of the conflict:
After the disintegration of the USSR in 1991, Ukraine and Russia remained close. But with years to pass and constant conflicts in the region, countries that were earlier part of the Soviet Union joined NATO, seeking support from the west and US. In 2008, Ukraine and Georgia tried to join NATO, but the request was turned down, due to divided opinions. The US strongly supported their admission. With internal political chaos in Ukraine since 2004, the biggest move was the amendment of the constitution to join the EU and NATO. Russia took an aggressive stance as Ukraine joining NATO will threaten the nation’s security and integrity. Ukraine on the other hand strongly wants to be a part of the EU and NATO.
Sanctions on Russia
Russia being an energy superpower, relies heavily on its conventional fuel deposits. Its economy also relies upon its sophisticated arms manufacturing and exports along with the automotive industry. The country ranks 10th on the list of Tourism hotspots in Europe.
USA and NATO members have put many sanctions on Russia, to stop the war, making it the most sanctioned country in the world. Also, western allies have imposed a ban on Russian banks in Swift International Payment System. It means that no debt or finance trade payment can be made, and thus it will be a serious blow to global trades and the supply chain. This leads to heavy discounts on Russian fuels and simultaneously a demand shortage globally, as Russia has enormous deposits of crude and natural gas.
*SWIFT is an international transaction system, which is used by banks to send secure messages of money transfers across countries.
The negative Impact of Ukraine- Russian conflict on the Indian economy
As India and Russia’s trades are quite limited, the war will not directly impact the Indian economy. Though saying our economy will be unaffected will be a lie, as global scenarios will have an indirect impact. So, let’s put some light on the negative impacts on our economy.
Crude: Russia is the third-largest oil-producing country in the world. Russia got onto the list of banned oil-producing countries including Iran and Venezuela. A ban on Russian oil affected the total supply of crude oil globally. While Russian oil went on heavy discounts, oil prices from other producing countries skyrocketed. Though India only imports 2% of its oil demand from Russia, it continues to face the brunt indirectly, as it imports 85% of its demand from the Middle East. With peace talks, a decline in prices might come, but with escalation, prices will catch fire.
Inflation: Due to escalation, crude oil caught fire. It not only increased the trade deficit but also increased the prices of various commodities. More than 6000 products, use crude oil and their prices have or will proportionally increase. Almost every sector has a direct or indirect relation with crude oil or its derivatives. Thus, inflation might go beyond predicted levels. As a countermeasure RBI will have to increase interest rates, to stabilize inflation.
Possibility of sanctions on India
Amid all this chaos, you might think about the possibility of sanctions on India by Western countries. With the majority of India’s import of defence equipment including S400 coming from Russia, the act could be possible. All these defence deals are against the USA’s Countering America’s Adversaries Through Sanctions Act or CAATSA. Before the Russia-Ukrainian conflict, it was assumed that the US would waive sanctions over India’s S-400 deals with Russia. India made it clear that the equipment was a necessary deterrent against China and Pakistan. Constant warnings have been given to India in this regard. Because of the Russia-Ukrainian conflict, now it seems very difficult to escape from the CAATSA act.
*CAATSA act is preventing a country to do defence deals with its rival countries.
Exchange rate: If the conflict between Russia and Ukraine continues, the Indian rupee might drop further. The reason behind the plunge is a concern of a spike in the inflation rate. It was evident with the recorded low on the starting day of the war. The rise in oil prices and increase in USA dollars index forced FPI (Foreign portfolio investors) to withdraw their investments over thoughts of rising inflation, depreciating INR even further to an all-time low.
The positive Impact of Ukraine- Russia conflict on Indian economy
The ongoing war benefits our economy only when we know how to take advantage of it. Here are some ways:
Russian currency: Russian Ruble has been on a free fall because of numerous sanctions imposed on Russia. The demand for the Ruble has gone down, causing imbalance and a threat of hyperinflation.
So how can the falling Ruble benefit the Indian economy?
Since western countries have put sanctions on Russia and banned them from Swift, India could do a Rupee – Ruble trade agreement. It will heavily benefit India as we can buy defence equipment and crude oil at great prices. It will give an additional boost to our economy.
Boost to agriculture sector: Both Russia and Ukraine export about 30% of the wheat in the world. Ukraine is known as the breadbasket of Europe. Wheat prices have jumped over 50% since Russia invaded Ukraine. Due to the ongoing conflict between these two nations, the global wheat supply chain is severely affected.
India also produces huge amounts of wheat and this conflict can make our wheat export surge.
Opportunities for Indian investors
The ongoing war between Russia-Ukraine can benefit Indian retail investors. Due to heavy selling by FPI’s, fundamentally good and blue-chip stocks become available at discounted rates. After the correction in the pandemic, this period has been a major correction period in which many good stocks across almost every sector has corrected. Those who have the knack, find it a golden opportunity for doing long term investments. Although, situations like war and international conflicts are unfortunate events and they should never happen.