Get used to it ukraine war may last long policy should adapt to new normal

Get used to it ukraine war may last long policy should adapt to new normal

Finland is expected to formally announce over the weekend that it will apply for a Nato membership. Sweden may soon follow suit. Finland’s membership of Nato, when it does come through, will make it the sixth treaty member to share a border with Russia – Norway, Estonia, Latvia, Poland and Lithuania are the others. Russia has warned of consequences if Finland joins Nato. In all, geopolitical tensions are unlikely to subside soon. Consequently, the economic disruption caused by the tensions is also bound to be prolonged.

India is likely to experience the economic fallout mainly through two channels, commodity prices and financial markets. The Indian basket of crude has hovered around $105/barrel for a while. In addition, commodities, including agricultural products, have recorded a sharp increase in the price level over the last six months. Elevated inflation is now a global phenomenon and it may endure for some time. The combination of geopolitical risks and inflation has jolted financial markets which are linked through portfolio investors. As most major central banks have begun aggressive monetary tightening, RBI’s job has become more challenging. Foreign exchange rates are one of the vehicles of monetary transmission. Fluctuations in the rupee’s exchange rate against major currencies in the wake of actions taken by other central banks can undermine RBI’s efforts in reining in inflation.

But despite the looming uncertainty, none of the challenges are new. High inflation along with financial market volatility is a situation India has dealt with earlier. RBI’s cushion of about $532 billion in foreign currency assets should be adequate to smoothen the adjustment underway as economic agents adapt to recent developments. The one certainty in this environment is that both firms and individuals will adapt to the situation. A prolonged spell of high commodity prices may catalyse a faster pace of transition in energy systems.