Middle East Tensions Can Affect Indian Trade, Macros

Chennai: Sustained flare-up in the Middle East tensions may affect imports, exports and remittances and the consequent rise in crude oil prices would affect WPI inflation, Current Account Deficit and FPI inflows, finds ICRA.

The ongoing geo-political tensions have led to an increase in Brent crude prices. 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 to India. The Suez Canal route is important for 35 to 40 per cent of India’s trade and this is done with European countries, North Africa and North and South America. Shipments may witness delay in transit and increase in cost if the escalation of the conflict sustains.

Iran was one of the major destinations of exports of basmati rice and tea from India in FY2023. However, its share went down significantly in FY2024. The ongoing geopolitical tensions may further constrain such exports to Iran in FY2025. Indian trade is significant for Iran for some agri and textile products.

An escalation of the ongoing conflict may impact FDI, FPI and remittances from Middle East countries like the United Arab Emirates (UAE), Saudi Arabia, Qatar, Oman, Bahrain and Kuwait, which have significant share in all these categories for India. These countries also house 50 per cent of India’s total stock of migrants, having travelled there for employment opportunities.

Further, 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 GDP. An escalation of the conflict would also exert pressure on the Rupee and may impact Foreign Portfolio Investors (FPI) inflows to India.

Additionally, this would pose upside risks to our WPI inflation, and to a smaller extent to our CPI inflation projections for FY25. A sustained surge in crude oil prices could also exert a drag on GDP growth during the fiscal.