India May Face Dire Consequences if Israel-Hamas War Prolongs
India may face dire consequences if the Israel-Hamas war continues, which began over the weekend amidst the ongoing ramifications of the Russia-Ukraine conflict. Experts are warning of significant impacts on India”s economy and security.
The stock market has already suffered, experiencing a sharp fall on Monday. At the close of trading, the Bombay Stock Exchange”s Sensex was down 483 points (0.73 percent), and the National Stock Exchange”s Nifty was down 141 points (0.72 percent).
According to Vinod Nair, the head of research at Geojit Financial Services, an unprecedented pessimism has swept through global markets. The rapid increase in oil prices is weighing on the market, as it may lead to high inflation and interest rates.
If the war persists for more than a fortnight, India will have to bear the brunt, according to an analysis by the economic research division of the Bank of Baroda. These predictions are tentative, given the nature of the conflict.
A significant factor casting a shadow on India”s growth targets is the rise in oil prices. Brent and WTI benchmark crude oil futures rose by 5% as soon as the war began. Saudi Arabia was on the verge of making a deal with Israel, mediated by Washington. As part of this deal, Saudi Arabia had agreed to scrap its production cut decision and offered to boost production. However, as the war began, the country was compelled to change its mind, leading to production shortages and another hike in oil prices.
Since India imports 84% of its oil for domestic use, a rise in crude oil prices will impact its economy. With inflation on the rise, the Reserve Bank of India (RBI) may find itself in a position to further raise interest rates, potentially leading to a recession.
“Now we can use the $90 number (for oil prices) as the threshold beyond which there is trouble for the world economy,” said Madan Sabnavis, chief economist at the Bank of Baroda in a note on Monday morning. “India can be affected if the price remains high due to further supply disruptions.”
“Iran joining the fray can affect sea routes and push up transport and insurance costs,” Sabnavis said. “Higher crude oil prices will distort our balance of trade and current account deficit, thus putting pressure on the rupee.”
According to Sabnavis, Israel imports around $5.5-6 billion worth of refined petroleum products from India. Another threat is India”s diminishing exports. As global demand is impacted by the war, exports may experience further pressure. World trade has already been affected by high inflation and interest rate hikes.
The majority of nations, including China, Germany, the European Union, the US, etc., are grappling with an export crunch, leading to a widening trade deficit. As inflation soars with the hike in crude oil prices, international central banks may be further urged to raise interest rates, which would lead to a boost in the dollar, affecting the rupee.
Moreover, as bond yields rise with the interest rate cycle, it could cause a banking crisis, similar to what happened in the US earlier this year.
