Crude supply, inflation risks for India if war spreads to West Asia: Economists

Senior economists are in wait and watch mode regarding the impact of the Israel-Hamas war on the Indian economy, while agreeing there may be a crude oil supply challenge if the war spreads across West Asia.

They said it is a bit early to comment on the impact as the situation has to be monitored.

“In the worst case, there is also a likelihood of the conflict spreading across West Asia and involving several nations. That may lead to further supply challenges in crude oil where supply cuts by OPEC+ (Organisation of Petroleum Exporting Countries and other oil producing countries) have already led to a rise in global prices,” Suman Chowdhury, chief economist and head of research, Acuite Ratings & Research Ltd told IANS.

Chowdhury said with the rise in geo-political conflict, the global economy and trade may face further slowdowns with a resurgence of inflation risks and greater volatility in the global markets, which in turn can have an adverse effect on the rupee.

“However, the direct impact of the conflict is going to be limited as Israel’s trade with India is a little over $10 billion with exports to Israel at $8.5 billion and imports at $2.3 billion in FY23,” Chowdhury said.

Madan Sabnavis, chief economist at Bank of Baroda ,told IANS: “The economic impact will be seen through oil price first followed by currency.”

On Reserve Bank of India’s (RBI) likely action, Chowdhury said it would only watch the evolving scenario and is unlikely to take any action at this point in time. “As the RBI gets more watchful, bond yields will stay high. Inflation impact will be seen on the wholesale price index, not consumer price index. As retail fuel prices will not change, higher crude prices will show on the oil marketing companies or fiscal if the government absorbs the same,” Sabnavis said.

“However, it (RBI) will endeavour to maintain the system liquidity on a tighter side through tools like OMO (open market operations) sales which may have an impact on bond yields,” Chowdhury said.

“Indian government may also take mitigating steps to cool down the prices of essential commodities in case the conflict expands to a full fledged war in West Asia and new supply bottlenecks emerge,” Chowdhury added.

On the other hand the gold prices are expected to go up due to the war. Jayantilal Challani, president, Madras Jewellers and Diamond Merchants Association and a partner in Challani Jewellry Mart, told IANS that the price went up on Saturday owing to the war.