Importing inflation – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/todays-paper/tp-opinion/importing-inflation/article65199563.ece

India should brace itself for a spike in inflation triggered by Russia’s invasion of Ukraine

As the conflict between Russia and Ukraine escalates, prices in the economy are beginning to surge, creating several challenges for policy makers. While India’s direct trade with Russia is not significant, accounting for just 1 per cent of exports and 2.1 per cent of total imports, the fact remains that Russia is a mover and shaker in global commodity markets and as a result, the knock-on effects of volatility on the Indian economy cannot be underestimated. Bloomberg’s base metal, energy and agri-commodity indices are up more than 20 per cent since the beginning of this year, with about a third of the price increase occurring after the invasion of Ukraine commenced. The biggest hit to India will be due to the surge in crude oil prices; crude oil futures have gained over 26 per cent since February 24. With Russia being the world’s largest exporter of gas and the second largest crude oil exporter, markets have a reason to be worried, though sanctions have not been imposed on fuel purchases from Russia. India’s problems are compounded by rupee depreciation, increasing the cost of imported crude oil.

It is almost a given now that consumer price inflation (CPI) will move beyond Reserve Bank of India’s (RBI) target zone with both fuel as well as food prices increasing sharply. Russia and Ukraine are important suppliers of agri commodities. Prices of palm oil and canola have been surging on fears that supply of sunflower oil from Ukraine may come to a standstill. Ukraine and Russia account for almost 90 per cent of India’s imports of sunflower oil. The use of palm oil and canola as biodiesel has also made prices surge as search for crude oil alternatives grows. With Russia and Ukraine also contributing significantly to global exports of wheat, maize, corn and barley, the prices of these commodities have risen. Around 17 per cent of India’s import of muriate of potash and roughly 60 per cent of NPK fertilisers are from Russia. Besides the upward pressure on consumer price inflation, producers’ inputs are also getting pricey as the war progresses. Global prices of base metals such as aluminium, nickel and steel have been moving higher pushing domestic producers to increase prices as well. Also, 30 per cent of materials used in infrastructure projects are imported from Russia, according to Nomura, thus pushing up construction cost.

The price increase will impact consumption and investment, if it is prolonged. But the immediate concern of the RBI and the Centre is the widening current account deficit as the value of imported goods, especially oil surges. This along with continued FPI outflows are beginning to weaken the rupee against the dollar, increasing the cost of imported goods. The RBI will have to review its outlook on inflation, against the backdrop of the recent movement in domestic and global prices. Rising prices can seriously impact growth, and the RBI will need to take corrective action. Even as the spike in inflation is driven by supply-side factors, a rate hike can buttress the rupee and stem foreign portfolio outflows.

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