The ongoing Iran-Israel conflict has escalated tensions not only in the Middle East and West Asia but also has significant implications for the global economy. Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research, highlighted the increasing impact of military actions between the two nations on global economic stability.
Chowdhury emphasized that the recent drone and missile attacks by Iran on Israel have elevated the geopolitical risk quotient, adding higher uncertainty to the global economic outlook. Although crude oil prices have not yet surged sharply beyond USD 90 per barrel (pb), there is a notable likelihood that they could breach the USD 100 levels if the conflict further intensifies in West Asia.
Here are the key impacts outlined by Chowdhury regarding the Iran-Israel conflict on the Indian economy:
Geopolitical Risks and Monetary Policy:
The heightened geopolitical risks and resulting uncertainty may delay decisions by central banks like the Federal Reserve (Fed) and Reserve Bank of India (RBI) to cut interest rates. This implies that interest rates could remain higher for an extended period, impacting borrowing costs and investment decisions.
Oil Price Volatility:
The conflict contributes to higher under-recoveries for Oil Public Sector Undertakings (PSUs) until the increased crude prices are reflected in petrol, diesel, and LPG prices. This could lead to an escalation in the oil subsidy bill, potentially surpassing projections set in the interim budget for FY25.
Impact on Industries:
Industries reliant on oil derivatives, such as petrochemicals, specialty chemicals, and paints, are likely to face challenges as prices for these commodities rise. This can impact their operating margins and overall profitability.
Rising Shipping Costs and Inflation:
Further escalation in conflict may result in increased shipping costs, translating to higher prices for imported goods. This, in turn, could contribute to wholesale inflation, adding to economic challenges.
Trade Disruptions:
The conflict’s escalation could lead to a slowdown in merchandise exports to West Asia in the short term, affecting trade flows and economic activity in the region.
Chowdhury also highlighted the vulnerability of economic forecasts, mentioning that the projected GDP growth and retail inflation for FY25 (6.7% and 5.0%, respectively) could be subject to revisions if the Iran-Israel conflict escalates further.
The impact of the Iran-Israel conflict extends beyond regional tensions, affecting global economic stability, trade dynamics, and inflationary pressures. As the situation unfolds, financial markets remain vigilant, monitoring developments closely for potential shifts in market sentiment and economic outlooks.
