India markets seen resilient to US-Iran-Israel tensions; risk rises if oil remains high

US-Iran-Israel conflict impact on Indian markets

• Indian Defence exports likely to get significant boost in terms of potential demand globally
• IMEEC to be back in focus and gains tremendous importance
• US likely to terminate Iran conflict in a matter of 4-6 weeks

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US-Israel joint action on Iran has already escalated to retaliatory action by Iran, impacting most of the countries in the Middle East. The likelihood of further escalation remains high, and it is likely to continue for several weeks and possibly months.

We have seen this movie before during the Russia-Ukraine conflict. That conflict was expected to end in weeks, and now it has been more than 4 years, and it is still going on. At this point, it is difficult to say whether the US-Iran war will continue for long.

The immediate negative action for the Indian markets was obvious. We need to focus on two major issues triggered by the war. One is the other obvious conclusion that the crude oil prices will spike. They have already spiked and could spike further. The other major issue is the disruption of merchant lanes or sea routes.

The crude oil price rise impacts the USD-INR as well, creating downward pressure on the INR. The sea route disruption could impact imports and exports of other goods besides crude oil. This could spike some inflation in the near term for India, thus constraining the RBI’s ability to cut interest rates in the near term. The good part is that the inflation has been near-zero, and thus the ability of the Indian economy to absorb an inflation spike is relatively strong.

Exporters would also face higher costs in shipping goods out via the longer trade routes, impacting their competitiveness in some markets.

In terms of sectors to be impacted, the oil marketing companies and gas companies will be immediately impacted. Chemicals, fertilizers, paints and FMCG are others that are impacted due to increased input costs.

In terms of FII action, again, the immediate reaction is likely to be further outflows as a “flight to safety”. However, the earlier Russia-Ukraine war showed that it hardly impacted Nifty.

In the medium term, Indian Defence exports are likely to get a significant boost in terms of potential demand globally. Such conflicts are continuously putting the spotlight on the need to be fully prepared for any eventuality. Several countries across the world would be evaluating their preparedness for such conflicts arising for them. Indian defence equipment is likely to find interest and eventually orders as a result.

Once the war is over and peace returns in the Middle East, IMEEC will be back in focus and gain tremendous importance as a stable trade route between East and West. This gives a huge opportunity to Indian infrastructure companies in terms of building the infrastructure. The most important aspect of the IMEEC would be Indian integration and entrenchment in the global economic ecosystem.

In short, the immediate impact is negative for India, but Indian markets are unlikely to be impacted too much unless crude oil remains significantly elevated for long. The current assessment is that the US doesn’t want a protracted war and is likely to terminate it in a matter of 4-6 weeks. In that case, the Indian markets should be quite resilient.