Rising oil prices, Middle-East mayhem could be India's inflation party pooper, warn analysts

For every $10 increase in oil prices, domestic inflation could rise by around 0.4 percent, warn experts

All cheers for India's July retail inflation easing below the Reserve Bank of India's 4 percent target, but don't get too comfortable—geopolitical tensions are bubbling up and could spell trouble for local markets soon. Over the last five days, oil prices have been heating up, thanks to rising tensions in the Middle East, and if Brent Crude decides to cross past $90 per barrel, India's inflation party might be cut short, according to market experts.

Sugandha Sachdeva, founder of SS WealthStreet indicated that rising geopolitical tensions could push Brent Crude to test $88 per barrel initially, with the potential to reach $95 if the conflict continues. On the flip side, any de-escalation might lead to selling pressure, with Brent finding support around $75 per barrel as the market refocuses on supply-demand dynamics.

Sachdeva explained that for every $10 increase in oil prices, domestic inflation could rise by around 0.4 percent due to India's heavy reliance on imported crude oil, which makes up nearly 25 percent of the country’s total imports. This dependency means that rising oil prices could lead to higher costs across various industries, ultimately driving up inflation.

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Currently, fuel and light hold a 6.84 percent weight in India's Consumer Price Index (CPI), while food and beverages dominate with a 45.8 percent share. Even though India's inflation reached a five-year low of 3.54 percent in July, Sachdeva warned that sustained increases in crude prices could disrupt the economy’s inflation trajectory.

The geopolitical situation in the Middle East is becoming increasingly volatile. Following the assassination of Hamas political leader Ismail Haniyeh last month, Iran has vowed an 'appropriate and deterrent response' against Israel. This development coincides with the US deploying the USS Georgia, a nuclear-powered guided-missile submarine, to the region.

The mounting risk of a broader conflict with Iran and its allies comes amid ongoing Israeli military actions in Gaza, where nearly 40,000 Palestinians have reportedly been killed since Hamas's surprise attack on southern Israel in October.

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Meanwhile, Bhavik Patel, senior commodity research analyst at Tradebulls Securities pegged brent crude to climb up to $88 per barrel amid rising 'war premium' positions. Further upside, he added, would depend on catch-up of fundamentals like demand play across global markets.

Similarly, Saumil Gandhi, Senior Research Analyst (Commodities) at HDFC Securities forecasted crude oil prices to trade in the broader range of $77 to $88-$92 per barrel in the short term, and any deeper escalation on the geopolitical front could race it towards $100 per barrel.

Market watchers have noted that the recent softer demand for oil, due to monsoon activities, sluggish global growth, and a reduced appetite from China, might cap oil prices from skyrocketing. OPEC has already trimmed its global crude oil demand forecast by 135,000 barrels per day for 2024, citing softer demand expectations from China.

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