The Russia-Ukraine situation may drive up retail inflation in India due to higher transportation costs and higher oil import bills

As tensions between Russia and Ukraine increase, the impact of high oil prices might reach Indian shores, rising fuel inflation, and the country’s oil import bill. Unless the government drastically reduces taxes on gasoline and diesel, India may suffer high inflation for a long time. India, which is a net importer of oil, imports very little from Russia in terms of oil and gas. However, if the West imposes sanctions on Moscow, the world’s second-largest oil producer, it may have an indirect influence.

“Higher crude oil prices will keep CPI inflation higher for longer, obliging the RBI to raise rates more than the two hikes we expect in August-December’22 – unless the government sharply cuts excise duties on petrol and diesel to contain fuel inflation,” ICICI Securities wrote in a note on Wednesday. For the ordinary consumer, transportation accounts for nearly a fifth of their CPI basket, and increased inflation in the form of gasoline costs might squeeze their wallets even more.

The price of crude oil has risen to over $100/barrel, and FM Sitharaman is keeping a close eye on the threat

Rising crude oil prices amid Ukraine-Russia tensions, Finance Minister Nirmala Sitharaman said on Tuesday, represent a danger to India’s financial stability, and the government is keeping an eye on the issue. According to Reuters, oil soared to over $100 a barrel on Tuesday, its highest level since 2014, after Moscow deployed soldiers into two separatist territories in eastern Ukraine.

If the US puts more sanctions on Russia, limiting Moscow’s capacity to export oil and gas, ICICI Securities forecasts Brent to remain over $100/bbl for most of 2022. If the Russia-Ukraine conflict is addressed via diplomacy rather than war, Brent crude prices would certainly fall below $70 per barrel in the second half of this year.

How the increase in Russian crude prices affects India

India purchases extremely little oil and gas from Russia since most Indian refineries are unable to handle the heavy crudes that Russia exports, as well as the high cost of shipping from Russia to India. According to ICICI Securities, the impact on the Indian economy would be minor in the short term, but the primary effect will be through the indirect influence on world oil prices.

“Russia sells 11 percent of the world’s crude oil.” “If sanctions knock around 60% of this off global markets (with China, Belarus, and a few other clients perhaps resisting the restrictions), world crude-oil supply would fall by 3mmbd, and Brent crude price would likely rise over US$110/bbl,” according to the brokerage.

“A prospective renewal of the Iran nuclear deal (JCPOA), which is now at a critical stage of negotiations, might restore approximately half of this supply within a few months, adding around 1.5 million barrels per day of production and exports.” “However, even if Iran’s status as a significant crude oil exporter is restored, Brent will certainly remain over US$100/bbl for most of 2022,” it said.

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