How geopolitical spill overs will impact Indian economy

  • India Infoline News Service
  • 27 Jun , 2022
  • 9:31 AM
Geopolitical risks have been elevated globally, ever since Russia invaded Ukraine. This was followed by a slew of sanctions imposed by the US and UK on Russian oil and other minerals. Things have become tighter with EU also joining the fray and agreeing to fully boycott Russian oil and gas from December 2022. Not surprisingly, Russia has retaliated and that has pushed the EU and the world to the throes of an energy crisis. Experts have called it the Lehman moment for global energy. How will it spill over on to the Indian economy?

Addressing the PHD Chamber of Commerce and Industry (PHDCCI) on this subject, the RBI deputy governor, Michael Patra, underlined this reality. According to Patra, the fallout of this geopolitical conflict had the potential to snuff out a recovery that was haltingly making its way in the Indian economy. Patra not only spoke about the magnitude of the spill over, but also outlined the measures taken by the RBI on the monetary front to address this issue.

India remains an island of growth

At last count, with World Bank downgrading global GDP growth to 2.8%, India remained the sole large economy poised to grow at above 7%. Despite the Omicron-driven third wave, the truth is that India is decoupling from the rest of the world and carving out a path of recovery. This was evident from the high frequency data points like the GST collections, e-way bills, advance tax numbers, PMI manufacturing, PMI services as well as the freight and cement numbers. In the latest monetary policy, the RBI toned down the growth estimates for FY23 to 7.2% (still lower than the World Bank estimates of 7.5%), but upped the inflation target to 6.7% for FY23.

What did change in the last 2 months is the tone and the stance of the monetary policy. Till the April MPC meet, the monetary policy was single minded in its pursuit of growth and recovery at any cost. However, since May 2022, the RBI turned hawkish. It not only hiked repo rates by 90 bps in 2 tranches but also hiked the CRR (cash reserve ratio) by 50 bps to 4.5%. The primary mandate now is price stability over the medium term, while sustained economic recovery has become a secondary objective. The argument of the RBI has been that if lower growth was unfair then high inflation was unjust. Of the two the latter was a worse problem to have. However, the X-factor was geopolitical tensions.

Emerging markets are bearing the brunt of geopolitical risk

As Patra rightly pointed out, the emerging markets (including India) were bearing the brunt of the geopolitical risk in more ways than one. Firstly, the global war situation has resulted in a combination of supply chain constraints widening the gap between demand and supply. This has led to commodity inflation of a very high order. Secondly, financial markets have become turbulent. Most global fund managers are adopting a risk-off approach. That means; they prefer the safety of developed markets to the high returns of emerging markets. The third impact is in the form of growth pressures. A spate of rate hikes is likely to lead to recession in the US with its spill over effect on India and other EMs. That will constrain demand and impact Indian exports, technology spending etc. As Patra put it eloquently, despite being bystanders, EMs like India are bearing the cross.

For the Indian economy, there are larger concerns. The capital outflows and the rising current account deficit are putting pressure on the Indian rupee. The INR has weakened beyond 78/$ and currency analysts are pegging it closer to 80/$. The war in Russia and Ukraine resulted in global shortages forcing India to pay more for the import of crude oil, fertilizers, coking coal and other industrial and agricultural commodities. The recent crisis in palm oil is a classic example of how this contagion has spread to agriculture too.

Fortunately, India has its buffers

The good news is that India has a reasonable number of buffers against geopolitical risk. Firstly, Indian economy is largely an inward looking and domestic demand driven economy. It is not like southeast Asian economies that are overly dependent on global trade to boost their economies. Secondly, India’s forex reserves are relatively comfortable, despite falling 8% from the peak to $596 billion. The forex chest is sufficient to cover 9-10 months of merchandise imports and the situation is a lot more comfortable if you also add the surplus in the services trade. Thirdly, even amidst commodity inflation and rising operating costs, the profits of Indian companies have grown strongly in the March quarter. That is likely to continue in the next few quarters too.

For a vast and complex economy like India, ample production and availability of food grains is the best hedge against any eventuality. In the year 2021-22, foodgrain production touched record levels for the 6th consecutive year. This has ensured food security even in the midst of widespread global shortages. The stock of rice and wheat stood at 3.7 times and 4.2 times respectively of the quarterly buffer norms. An important factor in this chaos is the availability of Russian oil at much cheaper rates. India has taken a stand to extend full support to the Russian economy and buy oil at deep discounts. That is likely to give the Indian economy a natural buffer against the spike in global inflation.

Monetary policy could be a double edged sword

Patra has however warned that the tight monetary policy adopted by the RBI could be a double edged sword. It is likely to take its toll on spending and demand. That is the price you pay for stability. The idea is to stabilise the price situation when the economy can still bear the shock. But the million dollar question is whether these monetary measures will get the better of inflation? After all, geopolitics is something India has little control over.

Patra give a counterview. The very fact that inflation is high and broadening means there is demand to afford such high prices. More than prognosticating, this is the time India can still afford to tighten, which is what the RBI is doing. Today, the assumption (and rightly so) is that growth is unambiguously impaired when inflation goes beyond 6%. Tightening now will not only keep the credibility of monetary policy but also boost growth in the medium term and help to stand up to the global contagion. That is good enough!

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Due to supply chain interruptions, major rail facilities fall short of production goals

  • India Infoline News Service
  • 05 Sep , 2022
  • 7:36 AM

For the first four months of this fiscal year, major production units of Railways failed their manufacturing goals for coaches, wheels, locomotives, and other rolling stock due to supply chain interruptions brought on by the Ukraine crisis.

According to documents obtained by the news agency PTI, "during the first four months of this fiscal, the manufacturing of these crucial components fell considerably below the proportionate target."

The subject of production shortage up till July 25 was brought up at a review meeting with the general managers of the companies, presided over by Railway Board Chairman and CEO VK Tripathi.

Because Mainline Electric Multiple Unit (MEMU) and EMU trains are used on short- and medium-distance lines, as well as those that link urban regions with suburban localities, the problem is more serious.

The records stated that the production of MEMU rakes—an arrangement of coupled coaches that constitutes a train but does not include the locomotive—has been "abysmally low," which is a severe reason for concern and requires prompt attention.

At the discussion, there were also concerns voiced about the lack of MEMU/EMU electric propulsion systems, 60 KVA transformers, and switch cabinets, according to PTI.

The GMs were urged to "address swiftly" such problems in order to prevent a "shortfall in output."

According to the document, the output of locomotives during this fiscal year up until July was about 28% lower than the goals set.

Documents show that 40 locomotive breakdowns were discovered in the 100 days leading up to June and that these failures required severe action.

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Russia moves closer to gold standard and what it really means

  • India Infoline News Service
  • 04 Apr , 2022
  • 10:07 AM
Towards the end of March, Russia made a rather startling announcement that could have long term implications. It decided to set a new peg for the Rouble in terms of gold. The benchmark, to begin with, was Rouble 5,000 per gram of gold. If you consider the global price of gold in dollar terms, this amounts to a substantial overvaluation of the Rouble vis-à-vis the dollar. However, Russia has made it clear that its peg with the dollar is immaterial and what matters is the peg of Rouble to gold.

Sanctions and the aftermath

This was Putin’s first major offensive against the global financial markets, which had sought to corner Russia by imposing sanctions at multiple levels. After putting sanctions on Russian payments, the latest round of sanctions by the US decided to curb the Russian trade in gold by disallowing the citizens of the US and its allies from trading with Russian banks for gold. These would be prima facie deemed illegal and would be immediately frozen.

These sanctions by the Western world are largely an outcome of the Russian attacks on Ukraine. Russia has been unhappy with Ukraine hobnobbing with the US via NATO. They had launched a similar attack to take over Crimea from Ukraine in 2014. This time, the focus was on a much longer and deeper battle of attrition. However, the unprovoked attack and the loss to human life has resulted in the West tightening sanctions on Russia.

How has Russia reacted to these sanctions?

Russia realizes that the US is able to dictate terms to the Western powers only because of the rampant use of the dollar as a standard of payment for trade and commerce. Barry Eichengreen called it the exorbitant privilege of the dollar, which artificially made the dollar valuable. This was despite successive US governments debasing the dollar with rampant printing of dollars. That is where Russia wants to hit and Putin sees an opportunity here. Here are the 3 stages in which Russia will play out its gold standard move.

1) The first step will be to offer the domestic Russian banks a window to sell their gold to raise short-term resources. These Russian banks cannot sell gold in the international markets due to sanctions. This move will encourage the flow of gold from the Russian commercial banks into the coffers of the Central Bank of Russia. For this purpose, the Russian central bank has already set a peg of Rouble 5,000 per gram of gold.

2) The second step would be to encourage flows into the rouble. What is Russia’s biggest trump card? In this case, nearly 60% of total Russian supply of oil and gas goes to the EU region, while Russia alone supplies about 35% of the oil and gas consumption of the EU. As the second step, Russia has already started insisting that all payments for Russian oil and gas should be either made in Rouble or in gold. What does this mean? If EU chooses to pay in Rouble, they have to buy Rouble and will strengthen the Rouble. Alternatively, if they pay in gold, there will be transfer of gold reserves from the EU to Russia.

3) The third and final step would be position the Rouble into a credible gold substitute at a fixed rate. This is akin to what the US offered as a dollar-gold peg till 1971, before Nixon officially abandoned the gold peg. That process led to the rise of dollar as a global standard. Russia envisages a situation wherein the dollar would be undermined with increased payments in gold and in other bilateral currencies.

Things change pretty fast; but this appears to be the plan. As we write, Russia has already diluted its stance and is willing to accept Euros for oil supplies to the EU. Obviously, the quid pro quo would be that EU will not be party to deepening of sanctions on Russia by the West.

How the Rouble gold peg will undermine the dollar?

To understand how the Rouble gold peg will undermine the dollar, let us look at a practical illustration. For example, Russia has announced that the peg of Rouble 5,000 to 1 gram of gold would hold till June 30th. If you take that as the benchmark and compare it to the dollar equivalent, you will understand why this is an attempt to debase the value of the dollar in the international market.

If you use the current exchange rate between the Rouble and the US Dollar, then the purchase price of Rouble 5,000 per gram of gold is equivalent to about $50 per gram of gold. Considering that one troy ounce (the global standard for gold) is equivalent to 32 grams, this translates into an indicative price of $1,600/oz. However, gold is currently quoting at $1,960/oz, so this translates into 18.8% virtual debasement (360/1960) of the US dollar.

What is the bottom-line and what this could imply?

If the sharp fall in many Western currencies on the day of the announcement is any indication, it is clear that the implications for the dollar are negative. A lot will depend on whether this Russian gold peg really works. But you can envisage some interesting implications of this move.
  • Firstly, it is not just the dollar but even other currencies like UK Pound, Canadian Dollar and Australian Dollar that are closely pegged to the US dollar that will take a hit. This could result in a lot of volatility in the current markets.
  • One possibility is that there could be selling in these currencies if these currencies are not revalued lower. However, it is a Catch-22 situation as debasing the currencies would also mean importing inflation and making these economies open to a surge in prices.
  • Lastly, if Russia has its way, many other countries could follow suit. China has long been calling for an end to the dollar hegemony. Many Middle East countries are now willing to accept Yuan for their oil exports to China. India already has a Rupee-Rouble trade channel with Russia. Things could just about amplify.
These are early days still. A lot would depend on how Russia is able to walk the talk and the support it derives from its new-found Asian allies.


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  • 05 September, 2022 |
  • 11:15 AM

According to documents obtained by the news agency PTI, "during the first four months of this fiscal, the manufacturing of these crucial components fell considerably below the proportionate target."

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