Explained: Economics in Wartime

While markets are likely to remain volatile in the short term depending on geopolitical developments, experts believe that since India is not a party to this external event and is not directly affected, its medium to long term economic outlook will not are not changed – and investors should not panic sell.

However, there are some concerns.

Inflation risks

Brent crude topped $100 a barrel for the first time in eight years due to supply issues. Russia is the world’s second largest oil producer.

Rising oil prices could accelerate already rising inflation. India imports more than 80% of its oil needs, but the share of oil imports in its total imports is around 25%. Rising oil prices will also impact the current account deficit, which is the difference between the values ​​of imported and exported goods and services.

While domestic fuel price increases have been put on hold as five states vote in Assembly elections, the recent surge in global crude could intensify pressure on state-owned petroleum retailers. The calibration of price increases is now more complex, given the cascading inflationary impact that could follow the increase.

Too, sanctions against Russia by the West could impact its trade with the world – and lead to higher prices for other commodities and products, including wheat, edible oil and metals. India imports most of its sunflower oil needs from Ukraine, and the two countries currently at war are also two of the world’s largest producers of wheat.

Economic recovery

Rising crude prices pose inflationary, fiscal and external risks. Oil-related products have a share of more than 9% in the WPI basket – and according to Madan Sabnavis, chief economist at Bank of Baroda, a 10% increase in crude would lead to an increase of around 0.9% in WPI inflation. A higher oil import bill will impact India’s external position; it is also likely to increase subsidies on LPG and kerosene, driving up the overall subsidy bill.

Some experts, however, say India’s economic fundamentals remain strong and the war will not have a significant impact on the economy. It is believed that with the third wave of Covid nearing its end and most restrictions having been lifted, there will be an increase in consumption and domestic growth, accelerating the pace of recovery.

Sensex closure; price of brent

FPI Sentiment, Rupee

Foreign portfolio investors have sold their holdings of Indian equities over the past four months after the US Federal Reserve announced an acceleration in the pace of stimulus withdrawal followed by interest rate hikes from March 2022. Investors have started withdrawing funds from emerging economies. to park them in US Treasuries and profit from the expected rise in bond yields.

Geopolitical concerns have intensified outflows over the past two months. Of the total REIT withdrawal of Rs 82,745 crore from November 2021, Rs 57,774 crore was withdrawn between January and February 2022. This outflow is expected to continue over the next few days. REITs netted Rs 6,448 crore from Indian stocks on Thursday, sending markets tumbling.

Monthly entry/exit REIT

IID behavior

As REITs retreated on Thursday, domestic institutions became net investors. According to provisional data released by the exchanges, DIIs invested a net amount of Rs 7,667 crore on Thursday, which is more than what REITs withdrew. Over the past two months, DIIs have invested a net amount of Rs 55,551 crore in shares.

Experts say current geopolitical concerns won’t impact long-term fundamentals and business prospects, and investors should seize falling markets as an opportunity to invest in mutual funds and high quality blue chip companies.

Equity investors

While markets may remain volatile, retail investors should review the DII investment model, investment advisers say. If DIIs are investing amid the steep decline in markets, retail investors shouldn’t panic either – and should increase their investments if they’re underweight equities.

On Thursday, while the Sensex fell 4.7%, the mid and small cap indices on the BSE fell 5.5% and 5.8% respectively. In times of volatility, investors should avoid venturing into small cap stocks and should invest in flexi cap and multi cap funds as they invest in all market caps and would generate higher returns when the market recovers.

Investors should also remember that while at the start of the pandemic the Sensex fell 14,300 points or 35% in the one-month period between February 25 and March 23, 2020, it has reached new highs. during the following year.

With strong fundamentals and concerns limited mostly to external factors, experts say markets will likely rebound once the situation eases. However, investors should not take unnecessary risks.

Gold Outlook

In times of uncertainty and inflation, gold emerges as the asset class of choice for investors. It is important to note that at a time when stocks fell, gold rose sharply. The price of 10g of gold in Delhi increased by 8.7% from Rs 47,507 on January 31 to 51,627 on Thursday. Prices jumped 3.3% on Thursday.

A report by Motilal Oswal Financial Services said gold prices are likely to rise further from current levels as investors head to the safe haven on inflation concerns over rising crude prices and rising crude prices. geopolitical tensions. “If the current situation worsens further, investors will cling to a safe-haven asset or sit on cash, i.e. the dollar. Along with geopolitical tensions, growing inflation concerns have also supported the precious metals prices at lower levels, supporting our view to buy on dips,” the report said.

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