Escalating Middle East crisis: Here’s how it’s impacting India

Policymakers and India Inc. are keeping a close watch on the escalating crisis in the Middle East and the potential impact on India.

The escalating geopolitical tensions was seen as one of the reasons for the Indian stock market crash on October 3, even as gold prices were near record highs and global Brent crude prices rose to above $ 75 per barrel. Indian exporters remain watchful about rising logistics costs due to rising conflict between Israel and Iran.

India’s Sherpa to the G20 Amitabh Kant noted that the G20 Leaders’ Summit in November in Rio de Janeiro will be meeting at a time when there are major geopolitical seismic conflicts taking place. These include the prolonged war in Europe between Russia and Ukraine that has been going on for nearly three years now while the Middle East is “up in flames”.

While government officials remained tight-lipped on the issue, the escalating tensions are also likely to be a key focus of the Reserve Bank of India’s Monetary Policy Committee, which will meet from October 7 to 9, that has been battling to control inflation.

Crude oil prices: A fallout of the crisis for India, the world’s second largest crude oil importer, could be higher crude oil prices that could further stoke inflationary pressures and also impact India’s import bill. While India has been importing significant amount of oil from Russia, it also remains dependent on the Middle East for supplies. Crude oil prices, which had eased to a three year low in recent weeks have been rising once again and have risen for three consecutive days now and are hovering close to $75 per barrel.

“The recent flaring up of Middle East/West Asia tensions needs to be closely watched for global crude prices behaviour in the coming weeks,” said a recent report by QuantEco Research. For now, oil prices remain below the RBI’s projection of average crude oil price at $ 85 per barrel this fiscal.

In FY24, of the total imports of $ 675 billion, India’s oil bill was $ 180 billion. 

Experts however, noted that while crude prices are trading higher on worries that the escalating conflict in the Middle East could threaten oil supplies from the world's top producing region, a large build in US crude inventories can provide some respite. “Crude prices are likely to trade lower as U.S. crude inventories rose by 3.9 million barrels to 417 million barrels in the week ended September 27,” said Prathamesh Mallya, DVP- Research, Non-Agri Commodities and Currencies, Angel One.

Gold: Gold prices are currently near record highs, driven by Iran’s direct involvement in the escalating conflict between Israel and Lebanon. The threat of this conflict expanding into a broader regional war has heightened uncertainty, pushing more investors toward gold, which is traditionally seen as a safe-haven asset during turbulent times.

Market analysts are projecting a further rise in gold prices. “On the charts, the trend remains positive with support at Rs 74,800/ Rs 73,980, while prices are likely to move higher toward Rs 78,500/ Rs 80,000 in the short term,” said Pranav Mer, Vice President of EBG - Commodity & Currency Research at JM Financial Services Ltd. As of October 3, the 24 carat gold rate in India stood at Rs 76,250 per 10 grams, up 2% in the past 10 days.

As geopolitical tensions and economic factors continue to unfold, the Israel-Iran conflict could further drive gold prices higher in the coming weeks.

Markets: On October 3, the Sensex tumbled 1,832 pts to 82,434 and Nifty lost 565 pts to 25,231.90. Along with SEBI tightening the norms for futures and options (F&O) to curb speculative trading, the Middle East crisis is being seen as another reason for this plunge. 

Prashanth Tapse, Senior VP (Research), Mehta Equities, noted that there was carnage on Dalal Street as markets plunged on across-the-board selling pressure on twin concerns of foreign funds pulling out from emerging markets, including India, and steadily increasing exposure to Chinese markets after the recent stimulus measures, while the escalating tensions in West Asia too has set the alarm bells ringing amongst the investors. “The second quarter earnings starting with frontline IT companies will set the tone of the market in the next few days. Also, Indian markets had witnessed stupendous rally over the past one month and the correction was in the waiting for some time,” he said.

Exports: Meanwhile, the commerce ministry and exporters remain watchful over the impact of the tensions on India’s exports not only to the Middle East but also on freight and logistic costs. Disruptions in key shipping routes, particularly through the Suez Canal and 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. It underlined that India faces tough times ahead, particularly for industries reliant on high-volume, low-value exports, as rising freight costs are expected to strain trade further.

What’s more, India’s trade with countries directly impacted by the conflict has faced significant challenges. Exports to Israel dropped sharply by 63.5%, Jordan saw a 38.5% decline due to spill over effects, and Lebanon experienced a 6.8% decrease.

(With inputs from Teena Jain Kaushal)