Extended Red Sea situation may revive concerns about global and Indian inflation

Extended Red Sea situation may revive concerns about global and Indian inflation

Due to attacks on commercial ships in the Red Sea, freight firms are now compelled to wait in adjacent ports to guarantee safe transit via the Suez Canal or take the lengthier route across Africa to reach the West. It's anyone's judgment as to whether assaults will escalate, but India is banking on its recent strong performance to defy gloomy global trends.

India trades with Europe, North America, North Africa, and portions of the Middle East via the Red Sea route via the Suez Canal.

The globe saw a huge spike in oil and food prices when the Russia-Ukraine conflict broke out in 2022, which prompted central banks to tighten monetary policy in an effort to reduce inflation. The current Red Sea crisis might cause operations to be disrupted, even if the dangers have decreased with the lowering of larger cost constraints.

Thirty percent of the world's container trade passes via the Red Sea, where Houthi rebels headquartered in Yemen continue to assault ships, raising the possibility of global inflationary pressures as shipping prices increase. moreover, 12% of world trade.

"Red Sea conflicts are on the rise, and the ongoing Panama Canal disruptions raise the possibility of inflationary pressure picking up again." A significant center for the passage of energy commodities, especially oil and liquefied natural gas, is the Red Sea. In average, freight prices for commodities have gone up as a result of the war, according to a study report released by S&P Global on January 18.

The study paper goes on to say that so far, the increase in commodity prices has been gradual. The present maritime issue is having a direct impact on Turkey (by supply-chain interruption), China (via energy imports), and India, three significant rising market economies.

In its assessment of the economy on January 29, India's Finance Ministry also noted the inflationary concerns related to the Red Sea issue.

According to the government, modifications to commercial trucks' routes are to blame for the most recent spike in shipping expenses.

Inflation is expected to rise if security hazards in international waterways are avoided, particularly when it comes to oil prices.

In the week of January 18, 2024, the Drewry World Container Index, which is used as a gauge for container freight prices generally, increased by 82 percent to $3,777 per 40-foot container. This number shows a notable increase of 148.3 percent from the rates seen on December 14, 2023, indicating a rise since ship assaults started.

"Trade lines from Asia to Europe have had the biggest rate rises...In its summary report for January 2024, FitchSolutions firm BMI said, "Yet, even with the ongoing Red Sea crisis, the increase in aggregate shipping rates is still somewhat lower than that seen during the peak of the pandemic in 2020–2022."

The Federation of Indian Export Organizations (FIEO), the country's leading trade association, has expressed worry about the financial strain that the sporadic assaults on consignments passing via the Red Sea are placing on Indian exporters.

"With the additional weight of several levies, freight prices have skyrocketed, compelling Indian exporters to stop around 25% of outbound cargo that are passing via the Red Sea, upsetting markets and companies. The globe is seeing a rise in uncertainty and fear, according to a note released by FIEO on January 15.

At a time when expectations are that central banks worldwide will soon begin reducing interest rates, the possible effect of the Red Sea crisis on oil prices might be a game changer. Economists thinkIt is projected that around the middle of 2024, the Indian central bank's Monetary Policy Committee would begin reducing the policy repo rate. Gains are also anticipated given the US Federal Reserve's dovish position in December 2023 and its announcement that it would begin lowering interest rates in June 2024. The same will need to be done by other developing market economies.

But it will be harder than it has been recently to get inflation to stabilize around the goal. This results from a lack of knowledge over how climate-related risks will affect food prices and how geopolitical events will affect the costs of transportation and supply chain operations. This is "likely to add risk premiums to interest rates," according to the research study from S&P Global that was previously mentioned.

In July 2023, headline retail inflation in India reached a 15-month peak. However, since then, it has reduced. The rate dropped to 5.55% in December, falling within the 2–6% tolerance range set by the Reserve Bank of India (RBI). Month three in a row. It has, nonetheless, now been over the 50% medium-term objective for four months running.

What is India's stake in this?

India trades with Europe, North America, and North Africa via the Red Sea route via the Suez Canal.

and a few regions in the Middle East. In the most recent fiscal year, these industries contributed almost 50% of the South Asian nation's Rs 18 lakh crore in exports and 30% of its Rs 17 lakh crore in imports, according to Crisil Ratings.

In a note published on January 25, Crisil said that the overall value of India's exports and imports during the previous fiscal year was Rs 94 lakh crore, with maritime transportation accounting for 68% of the value and 95% of the volume of trade.

India imports mostly crude oil, whereas its exports to Europe via the Red Sea's Suez Canal include food items, clothing, and electronics. Attacks on cargo ships have New Delhi worried about how this will impact its agricultural exports, particularly to Europe.

Given that around 30 to 35 percent of the output of agricultural goods, such as Basmati rice, is transferred to these areas, exporters are under pressure as increased freight costs have reduced outbound shipments and their Currently, a portion of the inventory is being sold on the home market. According to CRISIL, this has caused receipts to become softer.

In addition to other commodities, Crisil said that seafood (mostly prawns and shrimp) would also be significantly impacted since 80–90% of the output is exported, with the Red Sea accounting for more than half of that amount. is transmitted. However, businesses in some industries, such as the textile industry, could not be directly impacted since purchasers can afford to pay more for freight, increasing their profitability, while those in the capital goods industry continue to suffer from delivery delays. may have to deal with interruptions.

Moneycontrol said on January 15 that beginning in January 2024, the Red Sea crisis—which has resulted in cargo taking longer routes or experiencing delays—is anticipated to have a more substantial influence on India's commerce.

India's Commerce Ministry said earlier this month that the Suez Canal situation hasn't had a significant effect on the country's imports or exports to yet. The ministry did issue a warning, noting that the cost of imported products might rise sharply as a result of increased insurance premiums, greater freight expenses, and longer transit times.

After declining in the preceding months, India's goods exports finally turned a profit in December 2023, rising by 0.96 percent over the same month the previous year. Meanwhile, product imports increased by 4.9% year over year. The percentage fell.

Less serious worries exist over imports since, as of yet, the current has had little effect on pricing and just 10% of the world's oil traffic passes via the Red Sea. Furthermore, Russia and the Middle East provide India with a substantial amount of its oil needs, which are mostly transported via the Persian Gulf.

However, the price of crude oil is not expected to improve. Due to Red Sea interruption and geopolitical concerns, prices are predicted to be unpredictable in 2024.

G Krishnakumar, the chairman and managing director of Bharat Petroleum Corporation Limited (BPCL), said on January 30 that the decline in crude oil prices was caused by sluggish demand in major countries as well as geopolitical concerns, such as the continuing conflict between Russia and Ukraine and the Middle East situation. The state of pricing will be unstable.

The current price of a barrel of crude oil is around $80 due to low demand, mostly from China, and strong US supplies.

Since over 84% of India's crude oil needs are imported, changes in the commodity's price have an immediate effect on the nation's inflation rates. Consider the moments immediately after the start of the conflict in Ukraine. Around that period, the price of commodities increased dramatically on a worldwide scale, and in June 2022, oil hit a 10-year high, reaching Rs. This resulted in higher worldwide inflation, which had an impact on India's pricing position and external account.

Cheap oil imports assist India in controlling its external balance and reducing its trade deficit. In the first half of FY2024, the nation's current account deficit decreased to 1% of GDP due to robust services exports and inexpensive oil imports.

In the event that the Suez Canal issue escalates, the Indian government is already debating whether to switch the entry points for incoming petroleum supplies. The nation intends to depend more on nations like Iraq that transport commodities over secure borders, including the Strait of Hormuz, which separates Oman and Iran. Given the recent assaults, there are also worries that the flow of Russian oil from the Black Sea area may be halted or delayed.

India boosted its oil imports from Moscow when the Russia-Ukraine conflict broke out because of the steep discounts that Moscow was providing. Moscow is now the country's main supplier of oil to South Asia, followed by Saudi Arabia and Iraq due to the low cost of deliveries.

The Red Sea Route is crucial for the shipment of products to Asian developing market nations, as S&P Global pointed out. According to US Energy Information Administration statistics, in the first half of 2023, almost 75% of oil traffic south of the Suez Canal was made up of cargoes from Russia, most of which were headed for China and India.

The chief economist of Emkay Global, Madhavi Arora, said in December that the Red Sea dispute is not expected to seriously impact flows for India since the majority of its LNG and crude oil arrive via the Persian Gulf. However, there is a chance that the Russian oil flow from the Black Sea may be impacted, and its path may alter.

"This could also increase Middle East crude oil premiums," Arora said. The refineries and oil marketing companies (OMCs) that import crude may be somewhat impacted overall, but only if the issue is temporary. "Until then, a large-scale impact is unlikely."

Ever since the Israel-Hamas conflict broke out in December, assaults on commercial boats in the Red Sea have been making headlines. Due to this, large freight corporations are now obliged to decide whether to wait in neighboring ports to guarantee safe transit via the Suez Canal or take the longer route across Africa to reach the West.

It's anyone's judgment as to whether assaults will escalate, but India is banking on its recent strong performance to defy gloomy global trends.

Supply chain disruptions and other economic shocks are expected to recur in 2024, as the Finance Ministry pointed out on January 29. "If they go on, they will have an impact on global inflation, trade flows, and transportation costs. India refuses to." Relaxations may occur, but India is quietly confident that it can handle the mess that emerges since it has already withstood the shocks of COVID and the shocks of 2022 energy and commodity prices.