How a drawn-out Israel-Hamas war could hurt the Indian economy

The war between Israel and the Palestinian Islamist group Hamas has entered its fourth day, with the country stepping up its attacks on Gaza. Israeli warplanes bombarded downtown Gaza City early today (10 October) after defence minister Yoav Gallant ordered a “complete siege” of the Hamas-ruled isolated coastal enclave. Hundreds have died in Israel and Gaza in the conflict that reignited on Saturday after Hamas militants carried out an unprecedented, multi-front attack on the West Asian country. The war has also stoked concerns about its impact on the global market. For the Indian economy, a long-drawn conflict will present unfavorable scenarios. Let’s take a closer look at how the Israeli-Palestinian conflict could affect India. Oil prices The Israel-Gaza war spurred the oil prices soaring more than 4 per cent on Monday (9 October), with Brent crude costing $88.15 (over Rs 7,000) a barrel. The oil prices have eased after the sudden rise on Monday. Brent crude oil prices declined 0.44 per cent to $87.76 a barrel as of 11 am, reported Reuters. There are fears that a prolonged war between Israel and Gaza could increase oil prices. If Iran gets drawn into the conflict, India – which is among the top crude oil importers in the world – will feel the heat of these inflated prices. According to a Bank of Baroda analysis, if the conflict spreads to other West Asian countries and Iran gets involved, it could further escalate trade disruptions.

After Russia, Iraq and Saudi Arabia are India’s biggest suppliers of crude oil.

If the war lasts for two weeks or more, oil prices could see a jump, as per Bank of Baroda chief economist Madan Sabnavis. “Iran joining the fray can affect the sea routes and push up transport and insurance costs. Higher crude prices will distort our balance of trade and current account deficit, thus putting pressure on the rupee,” Sabnavis was quoted as saying by The Hindu. In case, the crude oil prices climb above $90 a barrel, the global economy as well as India will bear the brunt. According to India Today, Jayden Ong, Senior Market Analyst, APAC at Vantage, said: “Presently, there is a prevailing concern within the financial markets regarding the potential protraction of the ongoing conflict, leading to sustained upward pressure on crude oil prices.” “In conjunction with the OPEC+ production reduction agreement, this scenario is anticipated to contribute to a persistently elevated inflation rate. Consequently, central banks in diverse nations are expected to uphold elevated benchmark interest rates, a measure that may exacerbate the economic downturn”. [caption id=“attachment_13228372” align=“alignnone” width=“640”] There are fears that a prolonged war between Israel and Gaza could increase global oil prices. Reuters[/caption] A report by HDFC Securities said that the war does not threaten the oil supply currently, as neither Israel nor its bordering nations are major oil producers. “The fallout in markets will likely be determined by whether conflict spreads to the rest of the Middle East (West Asian) region, with oil traders also shifting focus to Iran, which is both a major oil producer and supporter of Hamas,” HDFC Securities’ head of retail, Deepak Jasani, was quoted as saying by Economic Times (ET). Union oil minister Hardeep Singh Puri told ANI on Monday that the Centre is monitoring the Israel-Hamas conflict and will handle the energy needs “with maturity”. With crucial Assembly elections in five states this year and the 2024 Lok Sabha elections, the Indian government may not hike retail fuel prices. However, wholesale prices are likely to increase, The Hindu reported citing experts. ALSO READ: Hamas now, Entebbe then: How Israel has had to deal with hostage crises Stock market Anxieties of a protracted war between Israel and Gaza were visible in the Indian stock market. NSE Nifty fell 0.72 per cent or 141.2 points to 19,512.4 on Monday, while the Bombay Stock Exchange’s Sensex was down 483 points (0.73 percent). HDFC Securities’ Jasani said the trading volumes on the NSE were “the lowest in many weeks”, reported The Hindu. “An unforeseen escalation in the Middle East has rekindled pessimism in global markets,” Vinod Nair, head of research at Geojit Financial Services, told ThePrint. “Moreover, the rapid surge in oil prices presents a significant threat to the global market, which is already dealing with elevated inflation and interest rates,” he added. Impact on gold, rupee Gold prices hit their highest in over a week today (10 October) as spot gold prices rose to $1,865.19 per ounce, reported Reuters. This comes as investors have turned to safe-haven assets like gold amid the uncertainty in West Asia. Rachita Malik, an analyst at Mumbai-based risk consultancy firm MitKat Advisory, told Times Now that higher oil prices would drive up “inflation pressure” in India and “weaken the rupee, making gold relatively more attractive as an investment hedge”. This is likely to push up domestic gold prices. [caption id=“attachment_13228412” align=“alignnone” width=“640”] Israel-Hamas war could drive up gold prices in India. Reuters (Representational Image)[/caption] A long-term war could impact India’s export earnings from Israel. India exports about $5.5-6 billion of refined petroleum products to Israel every year. According to Sabnavis, Bank of Baroda’s chief economist, any disturbance in this trade would hit the exchange rate, triggering a further depreciation of the rupee to a range of Rs 83-84 to a dollar, reported ThePrint.  Speaking to Reuters, Kerry Craig, a global market strategist at JPMorgan Asset Management, said, “It’s pretty early days to assess the meaningful impact of what’s happening in the Middle East and what it actually means for markets”. “If it takes a drawn-out time and we get more actors involved in it, obviously there’s going to be a bigger market impact from that.” With inputs from agencies