Israel-Hamas Conflict Sparks Concerns of Oil Price Surge: Impact on India’s Economy Explored

Oil pump jack is seen in front of displayed Israeli flag in this illustration taken, October 8, 2023.
| Photo Credit: Reuters

A protracted Israel-Hamas conflict could spur oil prices beyond India’s comfort zone and even if the government holds retail fuel prices ahead of critical elections, wholesale prices may spike and a higher import bill could pressure the rupee, according to experts.

Brent crude oil prices rose over 3% on Monday, crossing $87 a barrel even as equity markets around the world, including India, came under pressure as investors turned risk-averse and rushed to safe haven assets like gold.

Fears of a wider conflict between Israel and Hamas not only pulled down the NSE Nifty 0.72% or 141.2 points to 19,512.4, but also dragged trading volumes on the NSE to “the lowest in many weeks”, said Deepak Jasani, head of retail research at HDFC Securities.

Broad market indices fell more than the Nifty even as the advance-decline ratio fell sharply to 0.28:1, he added, stressing that the conflict is the latest negative trigger for markets that are already fretting about macroeconomic uncertainties in Europe and China, hawkish central banks and rising oil prices.

Also read: Israel-Palestine conflict LIVE updates on October 9

Beyond the short-term effect on markets, Bank of Baroda chief economist Madan Sabnavis said that if the war persists for even a fortnight or more, the oil dynamics will change. Crude oil prices going beyond $90 a barrel would pose trouble for the world economy as well as India.

“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,” Mr. Sabnavis noted.

For the government, there could be fiscal implications. With elections looming in several States and for the Lok Sabha in 2024, raising fuel prices may be an unlikely option, but higher costs will have to be absorbed either by oil marketing firms or the exchequer.

“Retail inflation can still be controlled by the government if it chooses to keep fuel prices unchanged. But wholesale price inflation will increase for sure. Some airlines have already increased fares after ATF price hikes, which is also inflationary,” the economist said.

Export earnings could also be hit as Israel buys around $5.5-6 billion of refined petroleum products a year from India.

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