The escalation of the conflict in the Middle East after Iran launched a barrage of missiles towards Israel on October 1 (even as the latter is engaged in a ground offensive in Lebanon and amid the ongoing battle with Palestine) is raising alarm bells around the world, including India. Policymakers and corporates are closely monitoring the developments and remain concerned about their potential impact on the domestic economy. Already, there has been a surge in crude oil prices, and equity markets have been on a roller-coaster ride.
Prime Minister Narendra Modi chaired a meeting of the Cabinet Committee on Security on October 3 to review the situation. Finance ministry officials have noted that India will face some impact in the event of further escalation, but for now there does not seem to be too much concern. Petroleum and Natural Gas Minister Hardeep Singh Puri has ruled out any impact of the rising oil prices on India and said there is enough oil available and India has enough choices.
The price of Brent crude oil in the international market spiked over 9% to $78.08 per barrel on October 4 from $71.54 barrel on September 27. The Reserve Bank of India has pegged average crude oil prices at $85 per barrel for FY25. The Middle East remains a strong supplier of crude oil, even though India has bought more Russian crude on the cheap in recent years.
There is some concern that rising crude prices could further stoke inflationary pressures and inflate India’s import bill. “The recent flaring up of tensions in the Middle East needs to be closely watched for global crude price behaviour in the coming weeks,” said a recent report by research firm QuantEco Research. In FY24, of India’s total imports of $675 billion, oil accounted for around $180 billion.
Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations, says 45% of India’s crude oil imports come from GCC (Gulf Cooperation Council) countries and over 50% of LNG comes from Qatar. “Crude oil prices have been moving up, and this could rise further in the coming days,” he says. India’s exports to GCC countries, pegged at about $200 billion, may also slow down, he adds.
Additionally, disruptions in key shipping routes, particularly through the Suez Canal and the Red Sea, have forced vessels to take longer paths around the Horn of Africa, leading to a 15-20% increase in shipping costs. “This has severely impacted the profit margins of Indian companies, particularly those exporting low-end engineering products, textiles, garments, and other labour-intensive goods,” said a recent report by think tank Global Trade Research Initiative.
Ashank Desai, Founder, Vice Chairman, and Managing Director of software services major Mastek, notes that the past few years have seen a lot of geopolitical issues, starting with the Russia-Ukraine war. “That has now been followed by the conflict in the Middle East, but the impact is still minimal for the IT industry,” he underlines. Elsewhere, the heightened uncertainty has pushed gold prices near record highs. Investors have made a beeline for the yellow metal to hedge against a potential widening of the conflict into a broader regional war.
Analysts say gold prices could rise further from `75,694 per 10 gm on October 4. “On the charts, the trend remains positive with support at `73,980–74,800, while prices are likely to move higher towards `78,500–80,000 in the short term,” says Pranav Mer, Vice President of EBG-Commodity & Currency Research at JM Financial Services. Equity markets, too, have been impacted as market capitalisation of BSE-listed firms tanked nearly `17 lakh crore in the week ended October 4. The benchmark equity index BSE Sensex tanked 4.5% to 81,688 in the truncated week.
Vinod Nair, Head of Research at Geojit Financial Services, says, “Investors are monitoring the escalating conflict... and have adopted a ‘sell on recovery’ strategy. Crude prices have moved up sharply but may be restricted due to an increase in production from OPEC+.”
(Inputs from Rahul Oberoi, Teena Jain Kaushal, Krishna Gopalan, and Surabhi) @iamrahuloberoi, @teena_kaushal, @krishnagopalan, @surabhi_prasad