India’s key benchmark indices recovered half of Thursday’s losses in morning trade today in line with a pullback that was witnessed in Asian and US markets overnight following as investors weighed the longer-term impact of tough Western sanctions against Russia after it unleashed troops, tanks and missiles on Ukraine. The BSE Sensex was up 1350 points at 55,880 levels, while the Nifty was around 416 points up over the 16,600-mark. Some analysts said the sanctions by the United States, Europe and a number of other countries were not as strong as markets had feared.
While Western nations redoubled their efforts to crimp Russia’s ability to do business — freezing bank assets and cutting off state-owned enterprises — they stopped short of disconnecting Russia from the SWIFT international banking system or targeting its oil and gas exports, which some analysts said had helped markets to recover.
“The limits to the economic pain that the ‘West’ was prepared to tolerate to support Ukraine and punish Russia have been revealed within 24 hours of Russia’s offensive beginning,” Jeffrey Halley, senior market analyst at OANDA, said in a note.
“The Russian offensive has occurred in a time of already high inflation and commodity shortages globally, and the West has blinked immediately. The process of throwing Ukraine under the geopolitical bus has begun. Markets clearly felt the same way, that this is the worst it can get…Thereafter, the power of buy-the-dip proved irresistible.”
The main factor therefore, driving today’s rally is the relief that the economic sanctions announced by the US and others have so far not included any exile of the Russian economy from the global SWIFT payment system -—a system of financial payments that moves money among thousands of banks around the world. And this is a key demand made by Ukraine because if Russia is excluded from SWIFT, then Moscow will find it extremely difficult to conduct international transactions.
Removal from SWIFT, which serves as the backbone of global banking payments, trades and currency exchanges, is seen as equivalent of a financial nuclear weapon — the harshest penalty that could be imposed on a country integrated in global markets. But US President Joe Biden said they were not willing yet to pull the plug on SWIFT because other countries, particularly those in Europe had failed to agree on taking the additional step at this point. Now, SWIFT is a Brussels-based entity and requires EU sanctions. EU member states are reluctant to make such a move because, while it would hit Russian banks hard, it would make it tough for European creditors to get their money back and Russia has in any case been building up an alternative payment system. Data from the Bank of International Settlements (BIS) shows that European lenders hold the lion’s share of the nearly $30 billion in foreign banks’ exposure to Russia.
Point to note: European countries rely on SWIFT to pay for Russian gas and oil, which explains its pushback since EU relies on Russia for around 40% of gas needs. So, rejecting Russia from SWIFT would hurt the EU’s ability to pay for the imports of Russian oil and gas it relies on.
So, what does all this mean for India?
“For India which has no strategic interest in this conflict the fall out will be mostly economic. Rise of commodity prices will impact current account deficit and domestic inflation. The export outlook of services towards Europe will be impacted negatively. Sanctions on Russia may impact regular trade (e.g. tea) between the India and Russia,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser State Bank of India.
Inflation could go up
While there are no immediate fears of a supply disruption or trade routes being blocked, oil prices soaring to an an eight-year high of $105 per barrel do have a short and medium-term impact on the Indian economy.
“The conflict between Russia — the second-largest exporter of crude oil with 12% market share — and Ukraine has expectedly raised already-elevated crude oil prices to 8-year highs. The prices could stay over $100 per barrel in the near to medium term unless the Opec decides to increase output materially. Interestingly, over the past three months, Opec members haven’t been meeting their production targets, which has influenced prices. The upshot is energy and trade-deficit negative for India, since we import nearly 85% of our crude oil requirement,” said Hetal Gandhi, Director, CRISIL Research.
Brokerage Jefferies expects the recent crude oil spike could result in Rs 6-8/liter hike in auto fuels, once the state elections get over in early March while brokerage Nomura expects a 10 per cent hike in petrol and diesel prices post the state elections.
A daily revision in prices of petrol and diesel and the monthly change in cooking gas LPG rate was halted as five states including Uttar Pradesh went to polls. The over three-month hiatus combined with the spike in international oil prices — on which domestic rates are dependent — has widened the gulf between cost and selling price. Industry experts have pegged the gap at well over Rs 10 per litre, which when passed on after completion of the elections next month would result in a spike in inflation rate which is already above the RBI’s tolerance level of 6 per cent.
Bank of Baroda’s Chief Economist Madan Sabnavis estimates that a 10% rise in oil prices would lead to an increase of 90 basis points in wholesale inflation.
“A sustained rise in oil and food prices would have adverse impacts 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 relative beneficiaries,” said Nomura India.
Oil routes not disrupted by sanctions
oil supply routes are currently unhindered by the sanctions imposed on Russia “Our suppliers are in the Middle East, Africa and North America, who are untouched by the conflict and they continue to supply oil and gas as normal,” a government official was quoted as saying by PTI.
Prices, however, are of concern as they will stoke inflation. “Retail prices are on hold but ultimately they will have to be increased at some point,” the official said.
Delivery of critical military equipment could be stalled
The conflict can stall the delivery of critical military systems in the pipeline from Russia such as the S-400 air defence system and Talwar class frigates, with the West looking at additional economic sanctions that can impact weapons trade. The Talwar class warships are designed to operate with a Ukrainian power plant, with no alternative option available, reported Economic Times. Moreover, two additional ships are to be made at the Goa Shipyard with Russian assistance. The power plants for them are yet to be delivered. There are concerns that uncertainty of supplies from Ukraine could adversely impact the project, said the report.
What about trade?
Saudi Arabia, Iraq and other Middle East nations account for 63.1 per cent of all imports for India. Africa is the second biggest supplier, accounting for close to 14 per cent of all supplies while North America gives 13.2 per cent.
Russia makes up for a third of Europe’s natural gas and about 10 per cent of global oil production. About a third of Russian gas supplies to Europe usually travel through pipelines crossing Ukraine.
But for India, Russian supplies account for a very small percentage. While India imported 43,400 barrels per day of oil from Russia in 2021 (about 1 per cent of its overall imports), coal imports from Russia at 1.8 million tonnes in 2021 made up for 1.3 per cent of all inbound shipments of the dry fuel. India also buys 2.5 million tonnes of LNG a year from Gazprom of Russia.
Exporters’ body FIEO said the Russia-Ukraine military conflict may have an implication on the country’s trade as it could affect the movement of consignments, payments and oil prices.
The Federation of Indian Export Organisations (FIEO) said it has asked exporters to hold their consignments to the region or goods that take the Black Sea route.
Just about 1.6 per cent of all imports that came into India in 2020 were sourced from Russia and about 1.3 per cent of all exports from the country were destined for Russia. Similarly, India accounted for just about 1.5 per cent of all imports by Russia and about 1.7 per cent of all its exports.
India’s main imports from Russia include fuels, mineral oils, pearls, precious or semi-precious stones, nuclear reactors, boilers, machinery and mechanical appliances; electrical machinery and equipment and fertilisers.
Major export items from India to Russia include pharmaceutical products, electrical machinery and equipment, organic chemicals and vehicles.
Natural gas: Supply for India unlikely to be affected
“The Russia-Ukraine war will have a big bearing on global natural gas markets, since Russia produces 17% of it and has a 25% share of total gas exports. Thankfully, India’s gas requirements are locked in contracts with Qatar, the supply of which is unlikely to be affected if the war doesn’t spill over. However, the impact of higher gas prices would be felt in India, just like everywhere else. Europe will bear the brunt since its dependence on Russian energy is very high — as much as 57% of the continent’s gas requirement is met by Russia. Global production and supply of energy will be in a state of flux in the short-term, and will impact countries dependent on imports,” said Gandhi.
FMCG companies will be impacted, also margins will be under pressure
“Elevated commodity prices will either pinch margins, or their pass through will constrain demand, both of which pose downsides to our current growth forecast of 9% for FY23, said Aditi Nayar, Chief Economist, ICRA
There is negative correlation between change in crude oil prices and EBITDA margins of consumer durable companies. “Historically higher crude oil prices have impacted margins for 2-3 quarters but we also note the durable companies have managed to pass on the inflation via pricing actions,” noted ICICI Securities in a report. It noted that ompact of increase in crude oil prices will be higher for smaller / unorganized sector.
Even brokerage Nomura has noted that price pressures will remain beyond February and consumer goods companies are set to further pass on higher input costs amid rising commodity prices to consumers in this quarter. It expects retail prices of home appliances, beauty products, and biscuits to go up.
Sushil Kumar Bajpai, president at RSPL Group, told the Economic Times the crisis will touch every aspect of Ghari detergent maker’s operations – “from inflating input costs due to high dependence of crude oil derivatives, a key ingredient in soaps and detergents, to distribution and packaging costs after an expected rise in fuel prices”.
Real estate prices will go up
Real estate developers are concerned about the pressure on input costs owing to rising geopolitical escalations between Russia and Ukraine. Fuel price hikes impact supply chain and logistics cost of raw materials, leading to an escalation in cost of construction.
Realtors’ body CREDAI said: “Post the geo-political escalations, oil prices have surged, and stock markets have crashed globally. ..Oil prices have continued to rise over the last couple of months owing to concerns over disruptions in the global supply chain amid the crisis. Additionally, it will further impact Indian cement makers as they were already reeling under the pressures of rise in costs of raw material and energy.
CREDAI said cement makers will need to pass on the burden as 60-65 per cent of their business is either directly or indirectly linked to crude prices, the association said.
“Eventually, the impact will trickle down into the real estate industry as well,.”
Edible oil
Nearly 60% of all sunflower oil in India, for example, is imported and Ukraine accounts for nearly three-fourths of the imports.
Markets
After seven days of continuous falls, domestic stocks saw some recovery on Friday. “The emerging markets broadly are looking better at this moment. And India in particular, is looking like an outperformer for now and also for this year. This geopolitical risk may not be so very high as far as India is concerned. We have other things to worry about. Of which one is the rupee depreciation and the other is the difference between the wholesale price index and the consumer price index, which is putting pressure on corporate margins. One will have to be selective in what you buy in India but can look at starting to top up investments at these levels,” said Devina Mehra, Founder & MD First Global.
“The Russian invasion was certainly a bolt from the blue for the markets. The fact that the Indian stocks were not cheap based on historical valuations did not help matters either. Having said that, the key benchmark indices are still expensive despite the fall. Any exuberance of going all out and buying the dip should therefore be controlled. In fact, if you are still holding on to fundamentally weak stocks that had gone up merely on hope, it may still not be a bad time to get rid of them. For those invested in quality stocks however, should stay put as the long-term India growth story is intact,” said Tanushree Banerjee, Co-Head of Research at Equitymaster.
“We are in a structural bull market like 2003-2007 and there were 3 corrections of more than 30% in the last bull run. We are seeing the first meaningful correction in the market and long-term investors should not panic by this correction because it is just taking out weak hands before resuming its upmove. This correction will provide a good buying opportunity where major wealth can be created in the next 3-5 years,” said Santosh Meena, Head of Research, Swastika Investmart Ltd.
With inputs from PTI and Reuters
While Western nations redoubled their efforts to crimp Russia’s ability to do business — freezing bank assets and cutting off state-owned enterprises — they stopped short of disconnecting Russia from the SWIFT international banking system or targeting its oil and gas exports, which some analysts said had helped markets to recover.
“The limits to the economic pain that the ‘West’ was prepared to tolerate to support Ukraine and punish Russia have been revealed within 24 hours of Russia’s offensive beginning,” Jeffrey Halley, senior market analyst at OANDA, said in a note.
“The Russian offensive has occurred in a time of already high inflation and commodity shortages globally, and the West has blinked immediately. The process of throwing Ukraine under the geopolitical bus has begun. Markets clearly felt the same way, that this is the worst it can get…Thereafter, the power of buy-the-dip proved irresistible.”
The main factor therefore, driving today’s rally is the relief that the economic sanctions announced by the US and others have so far not included any exile of the Russian economy from the global SWIFT payment system -—a system of financial payments that moves money among thousands of banks around the world. And this is a key demand made by Ukraine because if Russia is excluded from SWIFT, then Moscow will find it extremely difficult to conduct international transactions.
Removal from SWIFT, which serves as the backbone of global banking payments, trades and currency exchanges, is seen as equivalent of a financial nuclear weapon — the harshest penalty that could be imposed on a country integrated in global markets. But US President Joe Biden said they were not willing yet to pull the plug on SWIFT because other countries, particularly those in Europe had failed to agree on taking the additional step at this point. Now, SWIFT is a Brussels-based entity and requires EU sanctions. EU member states are reluctant to make such a move because, while it would hit Russian banks hard, it would make it tough for European creditors to get their money back and Russia has in any case been building up an alternative payment system. Data from the Bank of International Settlements (BIS) shows that European lenders hold the lion’s share of the nearly $30 billion in foreign banks’ exposure to Russia.
Point to note: European countries rely on SWIFT to pay for Russian gas and oil, which explains its pushback since EU relies on Russia for around 40% of gas needs. So, rejecting Russia from SWIFT would hurt the EU’s ability to pay for the imports of Russian oil and gas it relies on.
So, what does all this mean for India?
“For India which has no strategic interest in this conflict the fall out will be mostly economic. Rise of commodity prices will impact current account deficit and domestic inflation. The export outlook of services towards Europe will be impacted negatively. Sanctions on Russia may impact regular trade (e.g. tea) between the India and Russia,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser State Bank of India.
Inflation could go up
While there are no immediate fears of a supply disruption or trade routes being blocked, oil prices soaring to an an eight-year high of $105 per barrel do have a short and medium-term impact on the Indian economy.
“The conflict between Russia — the second-largest exporter of crude oil with 12% market share — and Ukraine has expectedly raised already-elevated crude oil prices to 8-year highs. The prices could stay over $100 per barrel in the near to medium term unless the Opec decides to increase output materially. Interestingly, over the past three months, Opec members haven’t been meeting their production targets, which has influenced prices. The upshot is energy and trade-deficit negative for India, since we import nearly 85% of our crude oil requirement,” said Hetal Gandhi, Director, CRISIL Research.
Brokerage Jefferies expects the recent crude oil spike could result in Rs 6-8/liter hike in auto fuels, once the state elections get over in early March while brokerage Nomura expects a 10 per cent hike in petrol and diesel prices post the state elections.
A daily revision in prices of petrol and diesel and the monthly change in cooking gas LPG rate was halted as five states including Uttar Pradesh went to polls. The over three-month hiatus combined with the spike in international oil prices — on which domestic rates are dependent — has widened the gulf between cost and selling price. Industry experts have pegged the gap at well over Rs 10 per litre, which when passed on after completion of the elections next month would result in a spike in inflation rate which is already above the RBI’s tolerance level of 6 per cent.
Bank of Baroda’s Chief Economist Madan Sabnavis estimates that a 10% rise in oil prices would lead to an increase of 90 basis points in wholesale inflation.
“A sustained rise in oil and food prices would have adverse impacts 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 relative beneficiaries,” said Nomura India.
Oil routes not disrupted by sanctions
oil supply routes are currently unhindered by the sanctions imposed on Russia “Our suppliers are in the Middle East, Africa and North America, who are untouched by the conflict and they continue to supply oil and gas as normal,” a government official was quoted as saying by PTI.
Prices, however, are of concern as they will stoke inflation. “Retail prices are on hold but ultimately they will have to be increased at some point,” the official said.
Delivery of critical military equipment could be stalled
The conflict can stall the delivery of critical military systems in the pipeline from Russia such as the S-400 air defence system and Talwar class frigates, with the West looking at additional economic sanctions that can impact weapons trade. The Talwar class warships are designed to operate with a Ukrainian power plant, with no alternative option available, reported Economic Times. Moreover, two additional ships are to be made at the Goa Shipyard with Russian assistance. The power plants for them are yet to be delivered. There are concerns that uncertainty of supplies from Ukraine could adversely impact the project, said the report.
What about trade?
Saudi Arabia, Iraq and other Middle East nations account for 63.1 per cent of all imports for India. Africa is the second biggest supplier, accounting for close to 14 per cent of all supplies while North America gives 13.2 per cent.
Russia makes up for a third of Europe’s natural gas and about 10 per cent of global oil production. About a third of Russian gas supplies to Europe usually travel through pipelines crossing Ukraine.
But for India, Russian supplies account for a very small percentage. While India imported 43,400 barrels per day of oil from Russia in 2021 (about 1 per cent of its overall imports), coal imports from Russia at 1.8 million tonnes in 2021 made up for 1.3 per cent of all inbound shipments of the dry fuel. India also buys 2.5 million tonnes of LNG a year from Gazprom of Russia.
Exporters’ body FIEO said the Russia-Ukraine military conflict may have an implication on the country’s trade as it could affect the movement of consignments, payments and oil prices.
The Federation of Indian Export Organisations (FIEO) said it has asked exporters to hold their consignments to the region or goods that take the Black Sea route.
Just about 1.6 per cent of all imports that came into India in 2020 were sourced from Russia and about 1.3 per cent of all exports from the country were destined for Russia. Similarly, India accounted for just about 1.5 per cent of all imports by Russia and about 1.7 per cent of all its exports.
India’s main imports from Russia include fuels, mineral oils, pearls, precious or semi-precious stones, nuclear reactors, boilers, machinery and mechanical appliances; electrical machinery and equipment and fertilisers.
Major export items from India to Russia include pharmaceutical products, electrical machinery and equipment, organic chemicals and vehicles.
Natural gas: Supply for India unlikely to be affected
“The Russia-Ukraine war will have a big bearing on global natural gas markets, since Russia produces 17% of it and has a 25% share of total gas exports. Thankfully, India’s gas requirements are locked in contracts with Qatar, the supply of which is unlikely to be affected if the war doesn’t spill over. However, the impact of higher gas prices would be felt in India, just like everywhere else. Europe will bear the brunt since its dependence on Russian energy is very high — as much as 57% of the continent’s gas requirement is met by Russia. Global production and supply of energy will be in a state of flux in the short-term, and will impact countries dependent on imports,” said Gandhi.
FMCG companies will be impacted, also margins will be under pressure
“Elevated commodity prices will either pinch margins, or their pass through will constrain demand, both of which pose downsides to our current growth forecast of 9% for FY23, said Aditi Nayar, Chief Economist, ICRA
There is negative correlation between change in crude oil prices and EBITDA margins of consumer durable companies. “Historically higher crude oil prices have impacted margins for 2-3 quarters but we also note the durable companies have managed to pass on the inflation via pricing actions,” noted ICICI Securities in a report. It noted that ompact of increase in crude oil prices will be higher for smaller / unorganized sector.
Even brokerage Nomura has noted that price pressures will remain beyond February and consumer goods companies are set to further pass on higher input costs amid rising commodity prices to consumers in this quarter. It expects retail prices of home appliances, beauty products, and biscuits to go up.
Sushil Kumar Bajpai, president at RSPL Group, told the Economic Times the crisis will touch every aspect of Ghari detergent maker’s operations – “from inflating input costs due to high dependence of crude oil derivatives, a key ingredient in soaps and detergents, to distribution and packaging costs after an expected rise in fuel prices”.
Real estate prices will go up
Real estate developers are concerned about the pressure on input costs owing to rising geopolitical escalations between Russia and Ukraine. Fuel price hikes impact supply chain and logistics cost of raw materials, leading to an escalation in cost of construction.
Realtors’ body CREDAI said: “Post the geo-political escalations, oil prices have surged, and stock markets have crashed globally. ..Oil prices have continued to rise over the last couple of months owing to concerns over disruptions in the global supply chain amid the crisis. Additionally, it will further impact Indian cement makers as they were already reeling under the pressures of rise in costs of raw material and energy.
CREDAI said cement makers will need to pass on the burden as 60-65 per cent of their business is either directly or indirectly linked to crude prices, the association said.
“Eventually, the impact will trickle down into the real estate industry as well,.”
Edible oil
Nearly 60% of all sunflower oil in India, for example, is imported and Ukraine accounts for nearly three-fourths of the imports.
Markets
After seven days of continuous falls, domestic stocks saw some recovery on Friday. “The emerging markets broadly are looking better at this moment. And India in particular, is looking like an outperformer for now and also for this year. This geopolitical risk may not be so very high as far as India is concerned. We have other things to worry about. Of which one is the rupee depreciation and the other is the difference between the wholesale price index and the consumer price index, which is putting pressure on corporate margins. One will have to be selective in what you buy in India but can look at starting to top up investments at these levels,” said Devina Mehra, Founder & MD First Global.
“The Russian invasion was certainly a bolt from the blue for the markets. The fact that the Indian stocks were not cheap based on historical valuations did not help matters either. Having said that, the key benchmark indices are still expensive despite the fall. Any exuberance of going all out and buying the dip should therefore be controlled. In fact, if you are still holding on to fundamentally weak stocks that had gone up merely on hope, it may still not be a bad time to get rid of them. For those invested in quality stocks however, should stay put as the long-term India growth story is intact,” said Tanushree Banerjee, Co-Head of Research at Equitymaster.
“We are in a structural bull market like 2003-2007 and there were 3 corrections of more than 30% in the last bull run. We are seeing the first meaningful correction in the market and long-term investors should not panic by this correction because it is just taking out weak hands before resuming its upmove. This correction will provide a good buying opportunity where major wealth can be created in the next 3-5 years,” said Santosh Meena, Head of Research, Swastika Investmart Ltd.
With inputs from PTI and Reuters