India slips to 3rd rank among EMs as Ukraine crisis takes toll

Mint’s Emerging Markets Tracker, launched in September 2019, considers seven high-frequency indicators across 10 large EMs to assess India’s relative position in the league table. It is updated around three weeks after a month ends once all data becomes available.

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Brazil’s stock market emerged as the best performer in February as the removal of Russia from benchmark indices led to reallocation of the money into the country, which is offering greater return due to high interest rates. The Philippines also benefited from the crisis, although its currency saw a marginal depreciation. Russian stock markets, on the other hand, tumbled the most, followed by India and China.

Rising coronavirus cases in China and the country’s zero-tolerance policy towards covid-19 are risks to its own growth. The ongoing wave of infections could further magnify supply-chain issues currently being faced worldwide.

Thailand’s stock market and currency performed well in February. However, lower GDP growth in the December quarter dragged the country down to the fourth rank.

While India had in January shrugged off the adverse impact of the spread of the Omicron variant, the country could not escape the fallout of the Ukraine crisis, with the US Federal Reserve’s decision to hike interest rate by 25 basis points last week expected to add to the risks.

To begin with, the surge in crude oil prices to above $100 per barrel spooked the markets and added to inflation worries. India’s inflation, despite a favourable base, rose to 6.07% in February from 6.01% the previous month even as fuel prices were on freeze due to the assembly elections. The spike in oil prices, along with a delayed hike in fuel prices, are expected to keep inflation elevated in the coming months.

The Reserve Bank of India has, so far, ignored the inflation prints above its upper tolerance limit of 6.0% in order to support growth. However, inflationary risks and the worry of flight of investors out of the country following the Fed’s rate hike to more attractive emerging market economies, may put the central bank in a tricky situation when it meets in April.

“Inflation will breach central bank targets in India, the Philippines and Thailand in 2022, but policy responses will differ,” said Nomura in a recent report. “In India, we expect higher oil prices to spill into inflation expectations and prompt 100 basis points of cumulative repo rate hikes, starting from June.”

On other fronts, India performed decently, with the manufacturing Purchasing Managers’ Index (PMI) rising to 54.9 in February from 54.0 the previous month.

Services PMI also showed an uptick to 51.8 from 51.5. Exports, once again, remained strong, recording over 20% year-on-year growth in February. However, Brazil, Russia, Indonesia and Thailand outpaced India. While India displayed steady growth in the December quarter, the GDP print of 5.4% was lower than expectations.