Oil & Geopolitics: Implication for Indian Equities

08 March 2022

The ongoing Russia-Ukraine has put pressure on global markets. As per data available, Geopolitical shocks have only driven turning points for the world economy twice since WWII. The most prominent pattern is for economic shocks to manifest regionally, not globally. Only 3 events since WWII have sunk the entire world economy namely: The OPEC embargo of 1974, The Global Financial Crisis and COVID (Refer Fig 3 Below).

The cumulative impact of economic sanctions (the freezing of more than $300 billion in Russian gold and FX reserves, among other punitive measures) are being felt across Russia. As of March 1, the Russian ruble lost 30% There is pressure on global markets with a continued bout of uncertainty. Our Global equity strategists highlights that equity markets have been weak ahead of previous conflicts but then recovered.

Is there emerging implication of the Russia-Ukraine Conflict on the Indian Equity Markets? Key Points appended below:

• 1. Citi India Economists highlight that Direct trade exposure to Ukraine and Russia are limited (both imports and exports). India is a major defense and sunflower oil importer from Russia and Ukraine respectively. If crude trades at >US$100/bbl for extended period of time- there is an upside risk~30bps upside to FY23 CPI forecast of 5%. Citi economists do not expect a major downside to INR (expecting RBI to counter).
• 2. Indian Market Valuations have moderated and are at ~5 year mean albeit Premium to EM is still elevated. Elevated valuations and limited upsides for Indian markets remain a key risk with CISI suggesting high single digit upside in 12m.



• 3. Global economics teams expect Commodity prices to decline soon since Energy sector has effectively been ‘ring fenced’ from this crisis. Citi analysts reduce their base case to a 25bp hike at the March 16th FOMC, as opposed to their previous base case of 50bp.Effect on dollar is more ambiguous & there could be buying opportunities for risky assets.

For more updates please visit Citi Wealth Insights