WHY ISRAEL-IRAN MILITARY CONFLICT WILL BE BAD NEWS FOR INDIAN ECONOMY
The escalation of the crisis in the Middle East, with Iran launching a direct missile attack on Israel, days after the latter bombed Iran's embassy in Syria, has further cast a shadow on the world's economy. The global economy was struggling to make a comeback after the crippling Covid pandemic, which drove up prices and disrupted supply chains. It is again under threat of a further slowdown as the world anticipates whether Israel would launch a counterattack on Iran.
Such a counterattack, for one, can send crude oil prices soaring, threatening to spike inflation and harming countries like India that depend on the Middle East for most of their crude oil requirements. It also puts pressure on the rupee, with the twin impact of high crude prices and weakening rupee widening the current account deficit (CAD). CAD refers to a situation when the country sends more money abroad than what it receives from overseas.
Brent crude oil prices had hit $92.2 a barrel on April 12âthe highest since October 2023âeven ahead of the Iran strike on April 13-14. Oil prices have remained close to the $90 mark since then, and on April 15 stood at $89.58 a barrel. One reason for the crude prices to be under pressure despite the attack by Iran is the threat of a global recession. But this could change and oil prices could soar further in the short term if the tensions escalate.
Global stock markets have been on a crash route, sending shockwaves through the Indian bourses too. After falling 793 points on April 12, the BSE Sensex fell over 845 points on April 15, to close at 73,399 points. Just last week, the Sensex had breached the 75,000 mark on India's strong economic growth outlook amid expectations of rate cuts, healthy corporate earnings and prospects of political stability after the Lok Sabha elections.
Meanwhile, gold prices have gone up in tandem with the rising tensions in the Middle East, as investors seek safe-haven assets. Gold has soared in the last 45 days from Rs 62,200 per 10 gm to touch Rs 72,800 per 10 gm, gaining almost 17 per cent in a very short period, according to trade analysts. The rupee was trading at 83.45 to the dollar on April 15.
Will the present situation on the economic front worsen? It all depends on whether Israel will retaliate. "If things remain where they are and there is no retaliation from Israel, then the nervousness should ease in a couple of days, and it should be back to normal," says Madan Sabnavis, chief economist with Bank of Baroda.
The US has indicated there would be no direct intervention from their side while the rest of the G7 nations have condemned the attack but not gone beyond this articulation. "Iran is anyway a country loaded with sanctions and hence there can be no significant change in the economic dynamics," adds Sabnavis.
Of concern to many is what if Israel responds. This may not be immediate, so that the effect can have an element of surprise. "This is a worrisome situation because while the escalation can lead to several countries supporting these two nations, the consequences on markets will be sharp," says Sabnavis.
Crude oil prices will continue to be impacted. Iran had a share of 4 per cent in the global oil production in 2023, with the US, Saudi Arabia, Russia, Canada, China, Iraq, UAE, Brazil and Kuwait together accounted for 68-70 per cent of the production, according to the US Energy Information Administration.
Depending on how OPEC or any of these major suppliers reacts, there can be a major shock to the oil economics. Once oil gets affected, the currency market would be under pressure. Higher crude oil prices and a weak rupee can have a detrimental impact on India's CAD. This has a potential impact on inflation and fuel prices. Other products, such as aviation turbine fuel, naphtha, gas and fertilisers, would also be affected. This basket has a weight of 7.6 per cent in the Wholesale Price Index. On the other hand, the Consumer Price Index will be less affected as the fuel prices are virtually administered.
With the Fed likely to take a hard look at interest rates due to potentially higher inflation, bond yields can remain elevated. The 10-year benchmark bond yield jumped to 7.17 per cent on April 12, the highest since January 24. The rising bond yield means the government will have to pay more as yield (or return to the investors), leading to a rise in cost of borrowings.
2024-04-17T13:35:22Z dg43tfdfdgfd