Widening of conflict in Middle East could impact India macros

A sustained flare-up in geopolitical tensions in the Middle East, and the consequent increase in crude oil prices, would negatively impact Indian macros, ratings agency ICRA said on Thursday.

“Geopolitical tensions may impact the Indian macros like CAD, currency, FPI inflows and inflation. For India, Iranian trade is not significant. However, a further escalation of the ongoing geo-political conflict may keep oil prices elevated. If Iran chooses to close the Straits of Hormuz, Indian macros would see a further negative impact,” ICRA said.

While a $10/bbl increase in average crude oil prices is likely to push up the Current Account Deficit (CAD) by 0.3 per cent of the GDP, an escalation of the conflict would also exert pressure on the USD/INR pair and may impact Foreign Portfolio Investor (FPI) inflows to India.

Additionally, this would pose upside risks for WPI inflation, and to a smaller extent to CPI inflation projections for FY2025. A sustained surge in crude oil prices could also exert a drag on GDP growth during the fiscal, ICRA said.

Following Western sanctions on crude oil, Iran’s share in the total Indian merchandise imports declined to below 1 per cent in FY2023 from the average of 2-3 per cent seen in the decade before FY2019.

Though India does not import any crude from Iran owing to the sanctions, the ongoing geo-political tensions have led to an increase in Brent crude prices, the research said.

Further, there is a threat that Iran may close the Straits of Hormuz, which is the main route of transport for crude oil from the Middle East (holding a major share in oil imports) to India, ICRA said.