Geopolitical Risks To Widen Current Account Deficit In Near Term: India Ratings

India Ratings and Research (Ind-Ra) believes that the geopolitical risks arising from the Russia-Ukraine conflict would push the import bill higher for items such as mineral fuels & oils, gems & jewellery, edible oils and fertilisers as India has significant import dependence on these items. As a result, merchandise imports may cross USD600 billion in FY22 (10MFY22: USD492.9 billion). The immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in current account deficit and rupee depreciation. Ind-Ra's analysis suggests that a USD5/barrel (bbl) increase in crude oil prices will translate into an USD6.6 billion increase in trade/current account deficit. Besides the Russia-Ukraine conflict, Sri Lanka has run into difficulty lately due to a forex crunch.

The ramifications of the Russia-Ukraine conflict on the Indian economy will be felt via higher global commodity (crude oil has been on a boil, surging to USD103.15/bbl on 27 February 2022) prices as India is a net commodity importer. Although the forex crunch faced by Sri Lanka is likely to have a minimal macro impact, companies having trade linkages with Sri Lanka may witness an adverse impact of the same.

Bilateral merchandise trade with Sri Lanka had peaked at USD7.46 billion in FY15, although since then it has declined to USD4.42 billion in 9MFY22 (FY21: USD4.41 billion). Likewise, merchandise trade with Ukraine, which had peaked at USD3.11 billion in FY13, has declined to USD2.35 billion in 9MFY22 (FY21: USD2.59 billion). However, India's merchandise trade with Russia was a bit higher at USD8 billion-11 billion during FY18-FY21 (9MFY22: USD9.44 billion).