Amidst the conflict between Israel and Iran, policymakers and experts are keeping a close watch on rising global crude oil prices that could dampen India’s growth prospects and upset the fiscal math if the geopolitical tensions in the Middle East continue for long.
Commerce Secretary Sunil Barthwal on Monday said the ministry is monitoring trade-related issues following the conflict and will speak to stakeholders before finalising any policy intervention.
“Whenever these conflicts erupt, the first thing we do is monitor trade,” Barthwal told reporters at a press briefing, noting that previous regional conflicts like the Ukraine–Russia war and the Red Sea issues have also happened in the recent past that required policy intervention.
“We are monitoring the situation and will take appropriate measures,” he said, while underlining that India’s exports now well diversified across countries.
India is the world’s third-largest importer of crude oil and imports a significant part of its requirements from the Middle East.
Madan Sabnavis, chief economist at the Bank of Baroda, said much will depend on the evolving situation. “If things remain where they are and there is no retaliation from Israel, then the nervousness should ease in a couple of days’ time and it should be back to normal,” he said in a note. However, if Israel responds, the escalation can lead to several countries supporting these two nations, and the consequences on markets will be sharp.
“Crude oil is what gets impacted immediately which is on the fringe of the nervous nineties. Iran had a share of 4% in total oil production in 2023 with the US, Saudi Arabia, Russia, Canada, China, Iraq, UAE, Brazil, and Kuwait together accounting for about 68-70% of total production according to EIA. Depending on how OPEC reacts or any of these major suppliers, there can be a major shock to the oil economics,” Sabnavis said, adding that this will also impact the currency market.
“These developments will impact our trade balance and can make the presently comfortable current account balance a bit shaky. This also has a potential impact on inflation and a view has to be taken on fuel prices,” Sabanvis said, adding that markets all over including India will be watching carefully these developments.
Moody’s Analytics had also highlighted that the key risk to Asia Pacific from this comes conflict from higher oil prices. On Friday, ahead of Iran’s attack on Israel, West Texas Intermediate crude was trading between $85 and $90 per barrel; of that, an estimated $5 was a risk premium in anticipation of the attack. “Now that the attack has happened, we expect oil prices to add another $5 per barrel to the risk premium, pushing oil to the $90 to $95 per barrel range,” it said in a report.
Impacts vary across APAC countries, but broadly there are three main challenges—oil prices add to inflation through higher energy and fuel costs, it adds to the cost of production and overall transport costs, lifting prices on everything from food to flip-flops, and higher oil prices can push up inflation expectations, making the job of central banks even harder. “All that pushes back the prospect of rate cuts, particularly if the US Federal Reserve delays monetary easing,” said the report.