Iran-Israel Conflict: India Faces Costlier Oil Imports, Trade Disruptions, Pressure On Rupee
India's anxiety amid the Middle East conflict lies in close economic links with the region and beyond. It doesn't help we import a lot of crude oil and gold.
The fresh military engagement between Iran and Israel this week brings about another challenge to India's economy as it tries to maneuver trade disruptions already caused by US tariff policies.
Israel on Friday conducted air strikes against Iranian nuclear installations and killed top military leaders. Tehran retaliated with missile and drone attacks on Israeli cities in the early hours of Saturday.
As the world glued on to the aerial exchange broadcast live on TV news, financial markets creaked in real-time.
Stock markets around the world, including in India, fell sharply as investors pulled money out of risky assets.
What fuels India's anxiety amid the Middle East conflict is the close economic and trade links with the region.
The Strait of Hormuz, a narrow waterway connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea, stands as one of the world's most critical maritime chokepoints. Over the years, Iran has repeatedly targeted merchant ships traversing the choke point and has even threatened to block the Strait in the past.
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Oil And Gold Import Reliance
Crude oil prices climbed sharply as Israel-Iran tensions simmered. The international benchmark Brent rose 7.2% to $74.34 per barrel.
India imports nearly 90% of its crude oil requirements — much of it through the vulnerable Strait of Hormuz.
Gulf oil exporters like Saudi Arabia, Iraq, Kuwait, Qatar, and the United Arab Emirates are heavily reliant on the Strait for nearly all their oil and gas exports. Iraq and Saudi Arabia are among India's top crude suppliers.
Besides, domestic gold prices also surged past Rs 1 lakh per 10 grams on Friday fueled by safe-haven demand and a weaker dollar.
Higher bullion and crude oil prices translate to a higher import bill for India, which puts strain on the country's trade balance.
Rupee Under Pressure
When India's import bill rises, the rupee suffers. The local currency tumbled to an 8-week low on Friday morning trade although dollar sales from the RBI capped further losses.
The rupee ended 49 paise weaker at 86.09 against the greenback.
'Imported' inflation while the RBI tries to steer its montary policy towards supporting economic growth is also a concern.
Trade Disruption
Other than oil and gas imports from the Gulf, India has trade links with the Middle East.
Out of the total $42 billion exports in March, India shipped goods worth nearly $6 billion to the region, as per the latest government data.
However, the country's trade that transits key shipping lanes like the Suez Canal and Bab-el-Mandeb Stairt located in the region is far more valuable.
Ships have been avoiding the Red Sea passage since early last year as Yemen-based Houthi rebels targeted vessels. That caused freight and tanker costs to rise, impacting exporters.
Fresh conflict in the region only adds to India's worries over trade with Europe and North Africa which relies on the gateway. It further punctures the India-Middle East-Europe Corridor (IMEC) that New Delhi and partner countries envisioned in 2023 to promote trade.
Already, the Trump administration's aggressive tariff policies have weighed on India's economy which hopes to raise its export bill to $1 trillion this year.
Indian officials have been negotiating with US counterparts for a trade deal, ahead of the July 9 deadline of reciprocal tariffs. India enjoys a wide trade surplus with America.
