India Inc fears crude oil rise, supply chain disruptions but impact likely to be limited

Both crude benchmarks on Tuesday surged more than 5% before closing around 2.5% higher.

Corporate India is worried about the rise in crude oil prices and freight costs as well as disruptions to shipping air routes as a result of the escalation of the conflict in the Middle East with Iran’s missile strikes on Israel.

“The first impact, which is little visible, is the upward movement in oil prices. Iran is a key player in the oil market. Any escalation or conflict could disrupt oil supplies, leading to higher prices, which would impact global economies, especially those much reliant on oil import,” said Ajay Sahai, director general and CEO, Federation of Indian Export Organisations.

Crude oil prices climbed more than 3 percent on October 2 on rising concerns that tensions in the Middle East could escalate, potentially disrupting output from the world's primary oil-producing region, following Iran's biggest ever military blow against Israel, according to a Reuters report.

Reuters reported that Brent futures reached their highest in a month, leaping $2.42, or 3.3 percent, to $75.98 a barrel. US West Texas Intermediate crude spiked $2.47, or 3.5 percent, to $72.30 at 1050 GMT. Both crude benchmarks on Tuesday surged more than 5 percent before closing around 2.5 percent higher.

Sahai added that the recent escalation could lead to further regional instability that may affect key trade routes like the Strait of Hormuz, where a significant portion of oil passes through, leading to high shipping costs and delays as well.

Supply chain disruptions, both on sea as well as in the air, are also a concern for Indian companies.

“Third is supply chain disruption, because if the Middle East is going through this kind of crisis, there will be disruption of transportation in logistics. It will not be confined to ships but it may impact air freight also, because yesterday, you must have seen that Lufthansa has called back its flights (from Frankfurt to Mumbai and Hyderabad). People will now avoid going overflying of Iran. It may require a longer route to reach a destination. It  may require more aviation fuel consumption, leading to higher freight and passenger fares,” said Sahai.

Sectors that could see an impact

According to analysts at Crisil Ratings, a rise in crude oil prices will affect linked sectors in India, such as aviation, automotives, paints, tyres, cement, chemicals, synthetic textiles and flexible packaging.

Higher crude prices would pose upside risks to India’s Wholesale Price Index-based inflation, and to a smaller extent to Consumer Price Index-linked inflation projections for FY25, according to rating agency ICRA. A sustained surge in crude oil prices could also exert a drag on GDP growth during the fiscal.

Additionally, higher inflation may lead to interest rates continuing to rule firm till a de-escalation of the crisis.

Another sector that could see a significant impact is the gems and jewellery segment as it could face rising gold prices as investors seek shelter in the safe haven asset. This could yled a hit to affordability and consequently dent the growth of gold jewellery retailers and result in inventory-related borrowings rising, which can have some bearing on debt metrics, according to Crisil.

Effects likely to be limited

To be sure, some experts believe that any impact of the recent escalation on the Indian macroeconomic situation is likely to be limited.

“The low demand from China has kept oil prices low. Now, with the further escalation of the conflict, this could keep oil at $90 per barrel. This would not be much of a problem given that the global economy has become more resilient to such shocks,” said Paras Jasrai, senior economic analyst, India Ratings and Research.

However, he cautioned that if oil breaches that level, the current account could be near 1.5 percent of GDP but still it would be manageable.

“There would be some impact, but so far, domestic factors have been strong, which has kept the overall outlook strong,” added Jasrai.