Indian markets may see heightened volatility in the upcoming week on account of geopolitical conflict heating up in the Middle East. Iran, on April 13, launched attacks against Israel, escalating the long-standing tensions between the two nations and increasing the risks of a regional war.
US President Joe Biden has reiterated that the US would support and defend Israel if such an attack occurred. As a result, the market will also be closely monitoring the movement of oil prices, which generally get impacted by geopolitical events.
On account of what could be the biggest escalation of Middle East tensions since the start of the Israel-Hamas war in October 2023, crude oil prices rose 1 percent on April 12. The increase was driven by concerns over potential supply disruptions. Brent crude settled at $90.45 a barrel, while U.S. West Texas Intermediate crude rose to $85.66, despite posting a weekly loss due to a bearish world oil demand growth forecast from the International Energy Agency (IEA) and worries about slower US interest rate cuts.
Also Read | Middle East in Turmoil: Iran attacks Israel with drones, missiles in unprecedented revenge mission
Cusp of price surge
The possibility of a full-blown Israel-Iran war has sent crude oil prices to near six-month highs. This comes after the OPEC extended voluntary production cuts of 2.2 million barrels per day to maintain market stability. Analysts predict that if Iran's attack results in a wider war, Brent crude prices could rise above $100 per barrel.
If the escalation leads to a disruption in the Strait of Hormuz, a critical trade route for oil, crude prices could surge to $120 or $130 per barrel, Bob McNally, president of Rapidan Energy and a former senior energy official told CNBC. Since India is a net oil importer, any spike in prices directly increases the fiscal deficit and inflation of the country.
High crude prices will have a bearing on India’s CAD (current account deficit) as it rises when the total value of goods and services a country imports exceeds the total value of goods and services exported. Every $10 increase in crude oil prices can cause CAD to expand by 40-50 basis points, according to analysts.
A higher CAD can affect investor confidence and weaken the country’s currency, which in turn can make imports more expensive, leading to higher inflation and poorer purchasing power of people.
Also Read | Oil prices edge up on escalation in Middle East tensions
The coming week will be crucial for the market as any significant escalation in tensions could trigger panic selling and volatility in global equity markets. Movements in US bond yields and the dollar index will be important factors influencing market sentiment.
"The market will also be closely monitoring the movement of crude oil prices, which are impacted by geopolitical events," said Ajit Mishra, SVP - Technical Research, Religare Broking Ltd.
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