The Indian equity market took a battering with Russian President Vladimir Putin ordering military action in Ukraine. The Sensex dropped as much as 4.98 per cent or 2,849 points and the Nifty 50 index crashed 5 per cent or 860 points to hit an intraday low of 16,203 on Thursday.
“Markets are likely to remain under pressure given the escalation of Russia Ukraine conflict into a war-like situation. Any reaction from NATO/US armies is only going to worsen the situation further. Investors need to keep calm to tide over the current situation,” said Siddhartha Khemka, head, retail research, Motilal Oswal Financial Services Ltd in a statement.
The markets are nervous as global money flies out in search of safe havens amid the uncertainty created by the situation. When markets take a hit, retail investors suffer, but the war could impact the common man in other ways too.
High Crude Oil Will Lead To Price Rise
Russia is a major exporter of oil, and the ongoing sanctions and conflict situation will affect the prices of oil worldwide. Already, crude oil price on the spot market has crossed $100 per barrel. “A knee-jerk reaction to Russia invading Ukraine pushed Brent crude beyond $100 per barrel this Thursday. Strict sanctions on Russia could also create further supply issues in an already tight market. This will be bad news for India, which depends on 85-90 per cent of crude imports from other nations for its requirements and will have imports at a higher rate,” says Sriram Venkataraman Iyer, senior research analyst, commodities and currencies at Reliance Securities.
Due to this exponential price increase in crude oil, Transportation costs will increase, leading to a price rise of several commodities and services.
“India is always overly sensitive to crude. There are some positives in this cycle of oil pressure. Having said that, given Europe’s dependence on Russian oil and gas, it will look to source from elsewhere. This means crude could go up further and lead to an inflationary environment in India,” says Kanika Agarrwal, co-founder, Upside AI, a SEBI registered PMS.
High oil prices may also lead to high inflation. “Spike in crude oil prices has been seen as supply has not kept up with the global demand. Global crude oil prices have massive contribution in determining the level of inflation in India because fuel hardly has any substitute and it plays a big role in India’s consumption,” says Shaily Shah, co-founder, Tarrakki, a mutual fund investment app.
High inflation will lead to high interest rates
In order to tame price rise and high inflation, the central bank, which has hitherto maintained an accommodative stance, may go for a hike in repo and reverse repo rates.
“To control inflation at pre-decided level, RBI may increase the repo rate which would lead to a spike in the interest rate on housing loan EMIs. This spike is due to EMIs being set by the banks based on the policy rate set by the central bank. Loans taken at variable rates will see a spike in the overall interest payments increasing a burden on the individuals availing the loans,” says Shah.
This rising loan interest rate will indirectly mean less saving of money by the common man, hitting consumption and demand.
“Given the US interest rate hikes as well as India's inflation rates, repo rates could go up again. This will have an impact on housing loans which are majorly variable rate and linked to MIBOR. The impact will be felt by people who have large-ticket housing loans,” says Mukesh Bubna, founder and CEO, Monexo Fintech Pvt. Ltd.
He explains through an example. A person having a Rs 1 crore home loan at 7.7 per cent per annum with a 20-year repayment tenure would be paying an EMI of Rs 80,559 per month. If the interest rate goes up by 50 basis points, the EMI will go up to Rs 83,644 per month, an increase of Rs 36,000.
