War of the world: India keeping tabs on West Asia conflict
Senior officials on Sunday assessed the rapidly evolving situation and its possible impact on India. “We are monitoring the situation closely,” a senior government official told ET.
Prime Minister Narendra Modi also chaired the Cabinet security committee meeting to take stock of the situation after returning from his two-day tour of the state.
Israel and the United States launched joint strikes on Iran early Saturday, including strikes against “dozens of military targets” as part of a “large, coordinated and joint offensive” that killed Iran’s supreme commander Ayatollah Ali Khamenei.
Economists fear increased volatility in the rupee as well as equity and energy markets due to the possibility of prolonged turmoil in the Gulf.
India and Asia Sonal Varma, former Japan Nomura managing director and chief economist, said India is one of the economies in Asia that is more exposed to high oil prices.
“The impact on India will be through the indirect channel (rise in oil prices and risk aversion sentiment),” said Anubhuti Sahay, head of India economic research at Standard Chartered Bank. He said the rupee was likely to bear a heavy burden but the weakening could be manageable for now, given that the rise in oil prices has been contained and the Reserve Bank of India (RBI) has ample foreign exchange reserves. “A key risk to watch is how quickly the Middle East stabilizes, as any protracted conflict will have impacts on oil prices and growth-inflation dynamics in India,” Sahay told ET. “India imports more than 85% of its domestic oil requirements and nearly half of its crude oil imports currently pass through the Strait of Hormuz,” Varma said. “The macro impact will depend on how much the oil price rises and the duration of the rise.”
The rupee fell 17 paise to 91.08 against the dollar on Friday; This was suppressed by the impact of large foreign fund outflows. Crude oil prices rose to $72-73 per barrel from around $65 last month. India imports 88-89% of its crude oil needs.
Nomura’s Varma stated that the inflationary impact of high oil prices should be mitigated for now, as oil marketing companies are unlikely to increase pump prices, so growth should also be well supported. “While the current account deficit remains manageable at ~1% of GDP, the main risk comes from capital account pressures from foreign investment outflows, which could be further exacerbated by geopolitical uncertainty,” he said.
Every 10 percent increase in oil prices causes the current account deficit to worsen by 0.4 percent of GDP.
“We think this is a short-term risk, but it is manageable and India’s medium-term outlook remains positive,” Varma added.
“We are monitoring the evolving developments and how the uncertainty will impact Indian macros,” said Aditi Nayar, chief economist at Exec. “As of now, the strong domestic outlook provides respite.”
“The prolongation and expansion (of the situation in Iran) will impact India’s macros, including the impact of fuel prices on inflation and twin deficits, as well as things like remittances,” he said. Retail inflation was 2.75 percent in January.
Bank of Baroda chief economist Madan Sabnavis said bond yields were unlikely to be affected but volatility in the rupee could intensify.
