4 Ways An Escalation In US-Iran Tensions Will Affect Indians Economically

On Thursday night, a US airstrike killed the commander of Iran's Islamic Revolutionary Guards Corps (IRGC) Quds Force Qasem Soleimani when rockets hit his vehicle near the Baghdad International Airport. The Pentagon confirmed that the US Forces had conducted the operation at the orders of American President Donald Trump.

Globally, Soleimani's death is of great significance as he oversaw Iran's military operations across the Middle East. Also known as the second most powerful man in Iran, he has been in charge of all the proxy wars across the Middle East in Iraq, Syria and Yemen.

As a trade partner of Iran and one of the biggest importers of crude oil, India and its economy is going to be affected if there is an escalation in tensions between Tehran and Washington. In fact, it is likely to affect your daily life.

1. Diesel and petrol prices

India meets 90 percent of its oil requirement through imports. After the attack, international benchmark Brent crude jumped as much as 4 percent to $69.50 a barrel.

Iran, which has vowed to retaliate to the killing of its key political figure, has a number of options ahead of it to do so.

In the past, Iran has threatened to close the Strait of Hormuz, the only sea passage from the Persian Gulf to the open ocean, an important pathway for ships carrying oil. It did so in 2018, after the US imposed sanctions on its imports, hurting Tehran's economy.

Some analysts also think that Iran could respond with attacks on oil infrastructure in the Persian Gulf and the Middle East.

In 2019, an attack on Saudi Arabia's oil plants disrupted its production gravely.

If a similar or larger degree of attack takes place, a shortage in oil supply will in turn push prices of petrol and diesel sold in India as these are revised on a daily basis based on international prices and exchange rates.

2. Rupee

If oil prices rise, a larger import bill will put pressure on India's current account deficit and in turn weaken the rupee.

Previously, in October 2018, the domestic currency had breached the 74-mark against the US dollar primarily due to a spike in oil prices. Petrol and diesel were also sold at all-time highs across Indian cities.

On Friday, rupee (INR) fell sharply by 4 percent against the dollar to day's low of 71.77.

3. Inflation

High fuel prices and weak rupee will fuel inflation. At a time when the economy struggling to come out of a slowdown and to push consumption, inflation will hurt RBI's efforts to push growth with interest rate cuts.

For the month of November, India's retail inflation (measured by consumer price index) rose to 5.54 percent from 4.62 percent, the highest since 2016 and over RBI's medium target of 4 percent. Food inflation touched 10.01 percent in November on account of high vegetable prices, especially onions.

An increase in fuel prices directly affects food prices as transport costs rise and could consequently hurt consumption further.

4. Equity Investments

On Friday, Asian shares reversed their gains as traders across global financial markets turned cautious following news of airstrikes. BSE's Sensex closed 0.39 percent or 162.03 points lower at 41,464.61, while NSE's Nifty 50 ended 0.45 percent or 55.55 points lower at 12,226.65.

As institutional investors look to reduce their equity exposure during times of such uncertainty, retail investors can look at it as an opportunity to purchase good stocks at discounted prices.