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India’s trade deficit widened to $21.2 billion in February from $17.4 billion in January, mainly because of increased imports of crude oil and gold. The oil deficit widened to $10.9 billion last month following higher crude prices.

Economists expect the trade deficit to increase further as commodity prices remain elevated amid the ongoing Russia-Ukraine conflict. Food and metal prices have risen. Brent crude oil prices have surpassed the $110/barrel mark.

Rising stress
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Rising stress

True, India’s exposure to Russia for oil imports and exports of other goods is low. Even so, the geopolitical tensions would weigh on global supply-chains and trade channels, creating upward pressure on prices. This would put global economic recovery in jeopardy. In short, the risks to recovery have risen.

What are the implications? “The pecking order of who gets impacted by the rise in commodity prices, particularly crude, is largely well established. Clearly, at the global level, the risk event is negative for business outlook and consumer confidence and would weigh on global recovery if it sustains for a long period," said Rahul Bajoria, chief India economist at Barclays. However, the economic impact on individual countries would vary with some facing both growth and inflation shock, while some would face only inflation shock, he said.

The uncertainty surrounding the Russia-Ukraine situation has prompted many analysts to raise their oil price forecast to $120-$150/barrel. “If we were to see a scenario where Russian energy exports are fully targeted, this could lead to a situation where we see Brent trading up towards $150/barrel this year," Warren Patterson, head of commodities at ING, said in a 2 March note.

Russia is a vital part of the global oil market. In 2021, it was the third-largest oil producer and second-largest oil exporter.

India imports more than 80% of its oil requirements and any increase in its price, therefore, fuels inflation and swells the import bill. Against this backdrop and after taking note of the February trade deficit data, expectations on the current account deficit (CAD) front are rather sombre. Barclay’s estimates suggest that every $10/barrel increase in the price of crude oil raises India’s CAD by $10 billion or about 0.3% of gross domestic product (GDP).

The CAD may cross 2.5%+ of GDP in FY23E, with oil sustaining above $100/barrel, according to Emkay Global Financial Services. “Calendar year till date 2022, the Indian rupee (INR) has been the worst-performing EM Asian FX. A higher twin deficit, global/domestic headwinds and possible change in global risk appetite could keep the pressure on INR intact," economists from Emkay said in a 3 March report.

Despite the gloomy outlook on global economic growth, the chairman of US Federal Reserve Jerome Powell hinted at a 25 basis point interest rate hike when the central bank meets on 14-15 March, on continued inflation pressures. One basis point is 0.01%.

As such, a prolonged war is a threat to inflation outlook of global central banks. An elongated oil price spike is set to delay global economic recovery.

“More often than not, the Fed’s tightening and oil spike triggers a downturn in the global economy. This time, economic recovery is badly split — prices versus volume; goods versus services; US versus EM and large businesses versus small, even as global debt is at an all-time high," Edelweiss Securities Ltd’s economists said in a 2 March report.

The downside risks to the global economy remain quite high, unless the Fed gives up on tightening as crude spike itself is demand-eroding, according to the report.

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