As oil reaches $100 a barrel and markets tumble, there are concerns about the budget calculations and growth.

Following Russia's attack on Ukraine, global crude oil prices exceeding $100 per barrel and stock markets igniting will cast a shadow not only on India's budget arithmetic, but will also put to the test the Reserve Bank of India's deftness in continuing to support growth in the short term with inflation risks suddenly becoming more grave.

Prime Minister Narendra Modi met Finance Minister Nirmala Sitharaman and other senior government officials on Thursday to assess the situation. With India's economic recovery still in its early stages following the third wave of Covid-19, new geopolitical concerns and a lengthy military engagement could stymie progress.

"The Prime Minister met with senior government officials to assess the situation emanating from the Russia-Ukraine crisis and its implications on India," a government official said. With crude oil prices increasing, the most immediate concern is on the price front: India's inflation rate is anticipated to rise faster than most official estimates. A higher-than-expected inflation reading may push the central bank to boost policy rates ahead of schedule, coinciding with the rate hikes scheduled by the US Federal Reserve for early summer.

The government is also concerned that falling stock markets will put a crimp in its budgeted disinvestment drive. "Will the government be okay with pricing it cheaper given the market conditions?" a fund manager inquired.

Brent crude prices surpassed $105 a barrel on Thursday for the first time since September 2014, after Russian President Vladimir Putin authorised a military operation in Ukraine's Donbas region. The Bombay Stock Exchange's Sensitive Index, or Sensex, fell about 2,700 points in a single day, the most in about two years. The Nifty fell 815.30 points, or 4.78 percent, to 16,247.95.

While India's commerce with Russia has not yet been seriously hurt by escalating tensions along Russia's border with Ukraine, the threat of broad sanctions against Russia imposed by Europe and the US looms big on bilateral trade. "The impact on India will be twofold: higher crude oil prices will keep CPI inflation higher for longer, obliging the RBI to raise rates more than the two hikes we expected in Aug-Dec'22 — unless the government sharply cuts excise duties on petrol and diesel to contain fuel inflation; and via the trade route, given that the EU is India's largest export market: supply disruptions to the EU are also likely to generate greater demand for steel, engineering goods, and so on." "Because India is an alternate supplier, the characteristics that caused India's exports to outperform the rest of the world in 2021 will continue to hold in 2022, allowing exports to remain robust," ICICI Securities researchers wrote in a note.

Despite the fact that India imports more than 80% of its oil needs, its share of total imports is only about 25%. Rising oil prices will have an influence on the current account deficit, which is the difference in the values of goods and services imported and exported. The increase in crude oil prices is also projected to raise the subsidy on LPG and kerosene, increasing the subsidy bill.

More crucially, the jump increases the pressure on state-owned oil merchants to raise retail prices, which is a priority for the NDA administration. These raises have been paused in the aftermath of the state elections, and an increase is likely shortly after the polls close. Calibration of the hike, according to officials, is now a more difficult task.

Crude price increases pose inflationary, fiscal, and external-sector risks. With rising oil prices having a pass-through effect on other industries, inflation could become even more structural. Crude oil-related products account for more than 9% of the WPI basket, and a 10% increase in crude would result in a 0.9% increase in WPI inflation, according to a research by Bank of Baroda chief economist Madan Sabnavis.

Earlier this week, Sitharaman stated in Mumbai that Russia-Ukraine tensions and a rise in crude oil prices "posed dangers" to India's financial stability. Higher fuel prices are projected to have a negative impact on consumption, which is already low owing to the pandemic.

Investor mood has also taken a hit in recent days as crude prices have risen. Foreign portfolio investors turned net sellers, withdrawing a net of Rs 51,703 crore from Indian shares during January and February, causing equity markets to fall and become volatile. The rupee has fallen more than 1.7% versus the US dollar, from 73.8 on January 12 to 75.09 on Thursday. Markets are likely to remain turbulent in the short term due to geopolitical concerns, according to fund managers, with FII outflows already at record levels.

Experts underlined that, while India's exports to Russia could continue largely unaffected by US sanctions, possible UN sanctions could have a significantly greater impact on exports.

Russia is India's 25th largest commercial partner, with $2.5 billion in exports and $6.9 billion in imports in the first nine months of FY2022. Mobile phones and pharmaceuticals are among India's top exports to Russia, while crude oil, coal, and diamonds are among its top imports from Russia. Tea is a significant export item from India.

In the April–December period, India's exports to Ukraine totaled $372 million, driven by pharmaceuticals and mobile phones, while imports totaled $2.0 billion, dominated by sunflower oil and urea. In the first three quarters of current fiscal year, India's exports to both countries accounted for less than 1% of total exports.