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Ukraine invasion: How the jump in crude prices will impact Indian economy

Russia Ukraine Conflict: Oil prices have been rising over the last couple of months due to tensions between Russia and Ukraine. Brent crude prices breached the $100 barrel today, as Russian President Vladimir Putin authorised a 'military operation' in the Donbass region. How will this impact the Indian economy?

People queue for fuel at a gas station in Sievierodonetsk, the Luhansk region, eastern Ukraine, Thursday, Feb. 24, 2022. (AP Photo/Vadim Ghirda)

Brent crude prices breached the $100 per barrel on Thursday, for the first time since September 2014, following Russian President Vladimir Putin’s announcement authorising a military operation in the Donbass region in Ukraine. Explosions were heard before dawn in Kyiv, the capital city of Ukraine, shortly after the announcement on Thursday.

While the West has termed the move an “unprovoked” and “unjustified” attack, oil prices surged and the stock markets crashed globally. While oil surged over 40 per cent to $101.2 (10.10 am IST) since December 1, 2021, when it was trading at $70.4, the benchmark Sensex at the BSE fell by over 1,750 points to 55,504 (at 10.10 am IST) and hit a day’s low of 55,148. The Rupee also fell 40 paisa or 0.5 per cent to hit 75.1 to USD.

Between January and February, FPIs have pulled out a net of Rs 51,703 crore from Indian equities.

Why has crude jumped?

The spike has been driven primarily by fears of supply side disruptions, following Russia’s invasion in Ukraine and Putin’s deployment of troops to separatist areas Donetsk and Luhansk in Ukraine.

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The Russian invasion of Ukraine could not only disrupt crude supplies globally, but also lead to sanctions by the US and Europe. The oil prices have been rising over the last couple of months on concerns over supply, following tensions between Russia, the world’s second-largest oil producer, and Ukraine.

There is also concern over the growing imbalance between demand and supply following the opening up and normalisation of the global economy after the Omicron wave has subsided.

The price of dated Brent or the price of physical North Sea crude oil cargoes set to be delivered on specific dates have already crossed $100 per barrel. The dated Brent benchmark established by S&P Global Platts hit $100.8 per barrel on February 16, its highest levels since September 2014.

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How will it impact the Indian economy?

There is going to be an inflationary impact. India imports more than 80% of its oil requirement, but the share of oil imports in its total imports is around 25%. Rising oil prices will impact the current account deficit — the difference between the values of goods and services imported and exported.

The rise in crude oil prices is also expected to increase the subsidy on LPG and kerosene, pushing up the subsidy bill.

How do high oil prices impact consumers?

High crude oil prices contributed to the increase in petrol and diesel prices that hit record highs across the country in 2021. Pump prices fell in November as the central government cut excise on petrol and diesel by Rs 5 and Rs 10 per litre respectively, and most states followed by cutting Value Added Tax.

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Petrol and diesel are currently retailing at Rs Rs 95.3 and Rs 86.7 per litre, respectively, in the national capital. Since the tax cuts in November, oil marketing companies have not revised prices, even as Brent crude fell from about $84.7 per barrel at the beginning of November to under $70 at the beginning of December. Higher crude prices now could result in higher fuel prices for consumers, even though they did not get the full benefit of the fall in crude prices in November and December.

What can be the impact on investor sentiment and markets?

Investor sentiment has taken a beating over the last few days in line with rising crude prices. Foreign portfolio investors have turned net sellers and have pulled out a net of Rs 51,703 crore from Indian equities between January and February, leading to decline and volatility in equity markets.

The rupee has fallen over 1.7% against the dollar from $73.8 per barrel on Jan 12 to hit $75.09 on Thursday.

Fund managers say markets are likely to remain volatile in the near term over the geopolitical concern.

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First published on: 24-02-2022 at 11:19 IST
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