The Indian economy has been chugging along at a strong pace of growth with low inflation, and the overhang of high U.S. tariffs has been lifted recently. But the Iran versus U.S.-Israel military conflict threatens to upend it.
The risks of an extended conflict in the Middle East, analysts say, could range from higher commodity prices to lower worker remittances and disruptions to businesses that have diversified to the flourishing economies in the region.
"A prolonged conflict, alongside a large jump in energy prices, would be a major macro negative (for India)," brokerage Jefferies said in a note on Monday.
The region accounts for 17% of India's exports, provides 55% of crude oil and 38% of worker remittances, it said.
Oil prices surged 8% on Monday following the military strikes over the weekend, with Brent crude for a while trading above $82 a barrel.
Prices could spike to $100 per barrel, Barclays said.
Global energy markets could face one of their gravest crises in decades with the scale of disruption likely to be determined by the duration of the conflict, Reuters Open Interest columnist Ron Bousso wrote. Read that piece here.
India could be among the most vulnerable if higher oil prices are sustained, analysts said. Read here to understand why. Government officials said on Monday steps will be taken to ensure local fuel supplies.
Every $10 per barrel increase in oil prices widens India's current account deficit to GDP ratio by 0.5%, Mumbai-based brokerage Emkay Global Financial Services said. It can add up to 35 basis points to retail inflation and hit GDP growth by 15-20 basis points, the brokerage added.
Nomura economists said that an extended increase in fuel costs could prompt governments in the region to use higher subsidies and lower taxes to protect consumers from the impact. "Higher oil prices solidify the case for central banks to stay on hold," they said.
Disruption of crucial sea routes could also hurt. Roughly a third of global seaborne crude oil exports pass through the Strait of Hormuz, with most volumes destined for economies such as China, India, Japan and South Korea, Moody's Analytics said.
An added risk for India is another spurt in already-high gold prices. Together oil and gold accounted for nearly a third of India's import bill in value terms in the current financial year till January.
Indian asset markets reflected these risks in Monday's trading, with equities and the rupee sliding and bond yields rising.
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