The escalation in tensions in Ukraine has impacted markets globally. Stock markets have corrected sharply, led by the Russian index, MOEX, which crashed by 17 per cent. Brent crude has spiked to $97 a barrel and the safe-haven investment, gold, has moved beyond $1,900. What are the implications for India in general and investors in particular?
The situation is fluid and we don’t know how the situation will evolve. The US-led sanctions on Russia can be swift, harsh and unprecedentedIf the sanctions include cutting off Russia from the international payments system SWIFT, that will hugely impact the Russian financial system. Along with that, if there are measures to deny Russia access to the dollar, the Russian financial system will be crippled, at least temporarily. Inflation is rising and will be further aggravated by the crashing rouble.
Shooting inflation will lead to popular discontentment. The support that Russian President Vladimir Putin gets from the plutocrats and oligarchs will be grossly insufficient to contain the popular discontentment arising from shooting inflation. Therefore, Russia is unlikely to go for a hot conflict in Ukraine.
Europe, particularly Germany, would be interested in a diplomatic solution even at this stage. They have a lot at stake with the Nord Stream pipeline from Russia to Germany running through Ukraine. If the diplomatic initiatives succeed in containing the damage and Russia desists from further aggression, markets are likely to stabilise. On the other hand, if the situation deteriorates, markets are likely to roil further.
For India, Brent crude at $97 is a major headwind. After the state elections, the government is likely to absorb part of the cost increase through excise duty cuts and pass on the other part to consumers. The inflationary impact will be significant. The Reserve Bank of India (RBI) will be forced to revise its FY23 inflation target upwards and will have to abandon its dovish monetary stance if crude oil prices stay high. The rising fiscal deficit (from excise cut on crude oil), a widening trade deficit and a depreciating rupee can become headwinds for the economy.
How will this crisis impact the stock market?
It is important to appreciate the fact that we are in a ferocious bull market; and bull markets are known to climb many walls of worries. If there is de-escalation in tensions, markets can rebound. But investors need not rush in to buy this dip aggressively as the situation is fluid. Soaring crude oil prices can negatively impact sectors such as tyres and paints. ONGC will be a clear winner. IT, with assured prospects, will be a good sector to be in during this uncertainty, particularly when the rupee is depreciating. Investors can start nibbling at high quality financial companies whose valuations have become fair, even attractive, thanks to the relentless FII selling.
History tells us that “Buy when there is blood on the streets” is a good strategy, particularly during geopolitical crises. Saddam Hussein’s invasion of Kuwait, the Kargil war, Russia’s annexation of Crimea has all been good buying opportunities. History may repeat itself.
First published in The Economic Times