Israel-Iran conflict unlikely to impact Indian macro economy for now

According to an analyst, even with oil at $90 per barrel, losses made by Oil Marketing Companies will be very minimal, and there isn’t a strong reason for the government to hike pump prices just yet.

As Iran mounted its attack on Israel, launching hundreds of missiles and drones in its first direct attack on Israeli territory, Indian markets brace for volatility in the upcoming week. Indian economists say that while the war could push crude above $100 per barrel, managing within that price range is feasible. “Now theoretically, even if that number is higher, our ability to absorb higher oil prices is a bit more,” says an economist with a global research firm.

There is also an expectation that the conflict is not expected to escalate further and could taper down with reports emerging of President Biden stepping in and telling the Isareli Prime Minister Benjamin Netanyahu to not re-escalate tensions. “Seems like the storm has passed,” says a geo-politics economic expert. “ Doesn’t seem to be a chance of an escalation of conflict.”

How Iran-Israel war can impact India

India imports over 80 percent of its crude oil needs rendering the South Asian nation vulnerable to global price changes.

If the conflict continues and oil supplies from the Middle East are affected, it will lead to the hardening of crude oil prices.

The impact ideally will be felt through two channels - an increase in inflation and a higher current account deficit. The impact on inflation would depend on how much higher prices are passed on to the consumers. If the conflict continues and prices remain high for a longer period it would translate into higher inflation, and lower profitability since the manufacturer does not have pricing power due to low demand.

“The present situation is such that the inflation is trending downwards and current account deficit is manageable. The economy will be able to withstand it for some time. However, if it continues for a longer time, it will impact both inflation and current account, which will lead to slowing down of economy and could delay monetary easing,” explained Devendra Pant, Chief Economist, India Ratings.

According to an analyst, even with oil at $90 per barrel, losses made by Oil Marketing Companies will be very minimal, and there isn’t a strong reason for the government to hike pump prices just yet.

From an inflation point of view, India is in a comfortable spot with headline retail inflation coming in at a ten-month low. The Central Bank on April 5, highlighted the recent uptick in crude oil prices and ongoing geopolitical tensions as potential risks.

Also Read: Iran-Israel war may push crude to above $100 per barrel; can trigger panic selling, volatility in equity markets

On April 13, brent crude settled at $90 per barrel while US West Texas Intermediate crude futures settled at $85.66 per barrelI.