US–Israel strikes on Iran over the weekend have been closely followed by everyone in India. The rising tension across the Middle East has pushed crude oil back into focus for both the Indian economy and Indian markets. Analysts warn that the latest escalation in conflict could sharply increase oil price volatility and hurt India’s trade balance if the conflict widens. But most rule out a sustained impact.
Brent crude has already climbed to a seven-month high of around $72.8 per barrel amid fears of supply disruption. Though the OPEC+ agreeing to a modest supply increase is good news, in terms of reigning in the price volatility, it is a crucial macro-economic factor that the street will be watching out for.
Strait of Hormuz a key factor: Supply disruption may push crude above $90
JM Financial, in its report, noted that limited retaliation could push prices up by nearly $5–10 per barrel. However, direct damage to Iranian oil infrastructure could add $10–12 per barrel.
The report further noted that any potential disruption of supply through the Strait of Hormuz is a key factor to watch. According to JM Financial, any supply disruption from the area could lift crude prices above $90 per barrel. The Strait, located between Iran and Oman, handles a substantial share of global energy shipments as well as large volumes of merchandise trade.
Nearly 20% of global oil flows through the Strait of Hormuz. More importantly for India, over 40% of its crude imports transit this route.
However, if the conflict turns into a broader regional war, then the crude prices could go beyond $100 per barrel, noted JM Financial.
India’s import bill can potentially surge on higher crude prices
One of the key worries if crude prices rise substantially is the direct impact on India’s import bills.
Prashant Vasisht of ICRA noted that the conflict could impede energy shipments through the Strait of Hormuz for Iran and other Middle East producers.
“A prolonged and/or widening conflict involving several oil and gas producers and the Strait of Hormuz could adversely impact global crude oil and LNG supplies and raise energy prices globally,” Vasisht said.
“For Indian refiners, while crude oil could be sourced from alternate locations such as the US, Africa, and South America, elevated energy prices could lead to a soaring import bill. Additionally, higher crude oil prices would moderate marketing margins and profitability of oil marketing companies,” he added.
Crude prices impact dependant on rupee’s movement
“Crude remains the key macro variable for Indian equities under the current escalation scenario,” JM Financial said.
However, leading economists also pointed out that any impact of the geopolitical risks on the economy is expected to be short-lived.
Gaura Sengupta, chief economist at IDFC First Bank that the rupee’s level along with crude and geopolitics is an important factor to monitor, The escalation in geopolitical risks is expected to be short-lived. There are risk-off sentiments in the near term with rupee crossing 91/$ in offshore markets. The rise in crude oil prices has added limited upside risk to CAD estimate for FY27 which is tracking at 1.5% of GDP assuming crude oil prices average at $70/bbl.”
She quite categorically ruled out a telling impact on the inflation situation – “We don’t expect any impact on domestic inflation as retail prices of fuels remain constant for the last few years. Any potential increase in crude oil prices will be absorbed by OMCs.”
Conclusion
Overall, though economists believe that higher crude or volatile oil prices are a worry for the economy, they do not see any sustained impact as of now. Additionally, both for the current account deficit and for inflation, they see only near-term concerns, no major risks.