Peace Talks and Market Behaviour

 

At the time when we are terrified with the havoc the war between Ukraine and Russia has created, the sentiments of share markets, seems to be zooming up. The irony is that everyone means a business!

The Global trade Markets reacted overwhelmingly to the news on Russians promise to reduce its military positions near Kyiv and its surrounding areas. Indian share markets too reacted positively with the positive signs in peace talks between Ukraine and Russia. It is highest since middle of February, which showed increase in share prices in automobile and financial sectors.

The war between Russia and Ukraine has disrupted Global Supply chain, it has lead to rise in shipping rates. India is facing shortage of containers and chips, apart from rise in fuel prices. Ukraine has stopped exporting of raw materials, apart from sanctions imposed on Russia by US and other countries. Russia being one of the biggest producers of oil and sanctions will definitely lead to sharp increase in oil price. This is going to increase the price of petroleum products in United States which will add to its inflation. Just natural like most governments do is to increase the interest rates to cope up the rise in inflation.

The International Monetary Fund has already estimated that the Gross Domestic Product of every country will be reduced by 0.5 to 2 per cent in the coming years.

The impact of Russo-Ukraine war to India

The uncertain situation has definitely led to a situation where everyone is worried about its impact on Indian Economy. Many economists feel it’s too early to predict.

Apart from the route of commercial airlines to the route of cargo planes have been deeply affected raising the cost of mobilization. It is certain how India manages the disruptions so that it has minimum impact on fiscal deficits, so that it can be minimized in due course of time. Fiscal consolidation will be the major issue, when country is facing with large debt and deficits in trading. The economy was in recovering phase after the impact of Covid-19.

The first impact we heard was about Indian companies are purchasing Russian Sun Flower oil at price which is highest ever. This was due to closure of supply from Ukraine. A total of about 5 Indian Industries are going to purchase 45K tonnes of Sun Flower oil from Russia. The import of Crude Sun Flower oil will cost about $2150 per tonne, which was earlier purchased at price of $1630 per tonne, before the Russian invasion to Ukraine.

Impact on Cost of Production and Rise in Inflation

Last year there was shortage of Fertilizer due rise in fuel prices, now it’s due to conflict it will add to the woes of the farmers. This can result in cost of agriculture production in the coming season. Apart from transportation, the post harvest cost will also rise due to increase in the cost of fuel. The fuel prices in India has been increased 9^th time in last 4 and half month period.

It is very natural due to this price rise of fuel, the logistic cost will be impacted and people will face the heat in terms of rising cost of daily commodity from milk to vegetables, which we purchase in routine.

War always leads to inflation and many countries have experienced how to cope up with it. The most popular method that everyone fear is rise in tax by governments to control rise in inflation. This can also result in recession and job loss in coming days. In normal time, inflation rises due to over spending without increase in production of goods and services. But war causes shortage of products due to various reasons from Political to other physical hindrances caused by war.

So in near future many countries facing the heat of Russia Ukraine war will have to fight inflation, which will include increase in lending rates by banks, thus reducing the consumers to take loans. Secondly, Central banks will force the banks to increase their reserve amount, meant to cope up withdrawal limits. These steps will also reduce the lending to the consumers. The third method is to reduce to supply of money in the market and increase in rate of interest of bonds owned by government.

Earlier, the monetary policy meant to curb inflation was to reduce the production of currency notes by the Central Banks, but now it would be challenging for government most of the transactions in India is now done online. It will be interesting to see how the economy behaves in near future.

Anyhow, what may be the effect of inflation we face, however the market behaves, the news of peace talks definitely gives a cool breeze. But it is certain life will not be same for the Ukrainians who have been displaced and it will years for them to come to a normal situation easily.