Russia-Ukraine crisis may raise retail inflation in India on costlier transport, higher oil import bill

The impact of high oil prices amid the worsening of tensions between Russia and Ukraine could hit Indian shores, raising fuel inflation and the country’s oil import bill. India could face higher inflation and for a long period, unless the government sharply cuts taxes on petrol and diesel. India, a net-importer of oil, buys very little oil and gas from Russia. However, it could be indirectly impacted if the West puts sanctions on Moscow, the second largest oil producer of the world. 

“Higher crude oil prices will keep CPI inflation higher for longer, obliging the RBI to raise rates more than the two hikes we expected in Aug-Dec’22 – unless the government sharply cuts excise duties on petrol and diesel to contain fuel inflation,” ICICI Securities said in a note Wednesday. Transport forms about a fifth of CPI basket for an average consumer, and higher inflation in the form of fuel prices could pinch their pockets even more.

Crude oil price hits nearly $100/bbl; FM Sitharaman keeping a watch on the threat

Finance Minister Nirmala Sitharaman said on Tuesday rising crude oil prices amid Ukraine-Russia tensions pose a threat to India’s financial stability and the government is keeping a watch on the situation. Oil rose to nearly $100 a barrel on Tuesday, reaching its highest level since 2014, after Moscow ordered troops into two breakaway regions in eastern Ukraine, according to Reuters.

ICICI Securities expects Brent to likely remain above $100/bbl for much of 2022, if the United States imposes additional sanctions on Russia, impacting Moscow’s ability to export oil and gas, if it invades Ukraine. However, if the Russia-Ukraine crisis is resolved through diplomacy, short of war, the Brent crude price will likely fall to less than $70/bbl in the second half of this year.

How Russian crude price hike impacts India

India buys very little oil and gas from Russia, partly because most Indian refineries cannot process the heavy crudes that Russia exports and due to transportation costs from Russia to India. So the near-term disruptions to the Indian economy will be minimal; but the main effect will be via the indirect impact on global oil prices, according to ICICI Securities.

“Russia accounts for 11% of global crude-oil exports. If sanctions take about 60% of this off global markets (with China, Belarus, and a few other customers possibly defying the sanctions), world crude-oil supply would decline by 3mmbd, and the Brent crude price would likely shoot above US$110/bbl,” the brokerage said.

“The possible revival of the Iran nuclear deal (JCPOA), now at a crucial stage of negotiations, could restore about half of this supply, adding about 1.5mmbd of production and exports within a few months.However, even with the possible restoration of Iran as a major crude oil exporter, Brent would likely remain above US$100/bbl for much of 2022,” it added.