Russia-Ukraine war: Where are the macros headed? Economists decode

As Russia’s invasion of Ukraine continues for the second month, dire consequences have been felt the world over. Commodity prices have reacted sharply to the war and businesses have felt the impact of the same.

As per CNBC-TV18’s poll on macro cues, consumer price inflation estimates, gross domestic product (GDP) and current account deficit (CAD) estimates have changed post the war.

To discuss the impact of these changes on the economy, CNBC-TV18 spoke to Anubhuti Sahay, Head-South Asia Economic Research, India, Standard Chartered Bank, Lakshmi Iyer, President and Chief Investment Officer-Debt and Head Products, Kotak Mahindra Asset Management Company, and YS Chakravarti, MD and CEO at Shriram City Union Finance.

Sahay said that it is likely that CPI could be above 6 percent for a few months. Assuming CPI at 5.4 percent, she expects a hike of 75 basis points in repo rate between August and December.

She said, "We are expecting 75 basis points of repo rate increase between August and December. This assuming an inflation average of 5.4 percent. We do acknowledge the risk of the first repo rate hike being advanced from August to June, because inflationary pressures are likely to remain far more elevated in H1 vis-a-vis H2. But as far as the quantum of rate increases are concerned, we are still sticking to our 75 basis points of rate increase unless inflation really sits at 6 percent for month after month."

According to her, the impact of inflation would be clear on GDP numbers. On soaring crude oil prices, Sahay mentioned that every 10 percent rise in crude is estimated to reduce growth by 20-30 basis points. She added that the rates depend on where the oil price settles.

"I think the impact of inflation would be pretty much clear on GDP growth numbers that is inevitable. Even if you go by RBI’s own sensitivity analysis, every USD10 increase or 10 percent increase in crude oil prices is estimated to reduce growth by 20-30 basis points, that impact is a given," she explained.

Iyer cautioned that receding liquidity seems to be the writing on the wall. She, however, doesn’t expect liquidity to go into deficit.

She said, "While we are obviously staring at a slightly more tepid growth globally obviously, because of this war-like scenario right now, however, it is significantly better compared to what we were in the pandemic scenario. So yes, the receding of liquidity seems to be the writing on the wall."

"We already have seen that over 2-2.50 half lakh crore of liquidity is currently where we are vis-à-vis where we were maybe five, six months back. So the trend is going to be towards a declaration of liquidity, but it's not going to be in the deficit mode for sure," she mentioned.

On US yields, She said that the 10-year yield could move past the 7 percent mark. She highlighted that US yields have risen by 60 bps in the past few sessions.

"Ever since the war has actually broken out, which is the last 30-35 days, US yields have reached close to about 60 basis points. Whereas in India, our 10-year benchmark, which is about 6.8 has just moved about 6-7 basis points. Clearly what the markets are indicating is that around approximately 75 basis points of rate hike, say between now and December-end, which is CY2022 seem to be already baked in."

"So even if 75 basis points are baked in incrementally, we can see the 10-year bond yields inching higher, going past the 7 percent mark. When it will go- Q1 or Q2 obviously, is a function of the RBI, stepping into support," Iyer said.

Chakravarti, mentioned that he doesn’t see an impact of war on non-performing assets (NPAs) or on credit offtake. He explained that he sees most of the credit growth coming from demand for working capital.

He said, "As of today, we see most of the credit growth coming from the demand for working capital. So unless we see capex going up, I think 8.50 percent is a decent number to bank on."

Watch the video for the full interview.