Tensions Easing?

The Indian equity markets, along with global markets saw gains this week. The Nifty was up 3%, further extending the gains that have been seen over the last couple of weeks. This was primarily led by:

1. Increasing hopes of a ceasefire between Russia and Ukraine (while Russia just accused Ukraine of an airstrike on its soil)

2. Some cooling off seen in global commodity prices (while petrol and diesel prices were hiked 9 times in the last 2 weeks)

So, what’s up?

The war 🔫

We’ll try avoiding comments on the outlook of where the conflict is headed given a plain lack of expertise, and hence foresight. However, we can comment on the impact of the war on the global economy.

Ceasefire or not, 2 things continue:

1. Sanctions on Russia

2. Supply chain issues for anything that Russia and Ukraine export

Both of these factors will impact inflation, which had been a fear even before the conflict started. Which naturally brings us to the second point - inflation.

Inflation 🔺

Global oil prices saw a dip last week. This was on account of several factors:

1. Russia and Ukraine claiming progress on peace talks

2. A lockdown in Shanghai because of COVID, resulting in lower demand

3. The US saying it will release 1 million barrels of oil per day from its reserves to curb prices

Other commodities too saw prices normalising - gold, silver and palladium being a few of them.

In India, however, the hikes were seen on 9 days in the last 2 weeks. The spree was set by a post-election raise in prices, during which prices had risen by 30%. Price hikes were also seen across multiple other areas - cars, wheat, edible oils, LPG, CNG, pet coke, cement, packaged foods, etc.

But, inflation fears in India may be short-lived. Even the RBI hasn’t been worried too much. Why?

1. Global prices seem to be normalising

2. India has sourced crude at discounted prices from Russia, and has said will continue doing so

3. Unlike the US, India’s employment market isn’t running super-tight

What next?

• An increase in prices across the board is kicking in, and fast! Inflation is getting real, and starting to hit both businesses and consumers.

• Pressure will rise on both corporate profits (as input costs increase), and growth (as demand gets hit because of higher prices to consumers).

• Although the RBI has been pro-growth and sees high inflation as transient, the negative impact is already hitting. However, this is expected to be temporary - and that can be seen in the optimism with which the markets have rebounded.