Escalating Iran-Israel Conflict Raises Concerns for Global Economies

Iran-Israel Conflict
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The ongoing Iran-Israel Conflict has not only heightened tensions in the Middle East and West Asia but is also beginning to impact global economies, according to Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research.

Geo-Political Risks and Economic Uncertainty

Chowdhury emphasizes the perceptible increase in the geo-political risk quotient due to drone and missile attacks on Israel by Iran. This escalation adds uncertainty to the global economic outlook. While crude oil prices have not yet surged beyond USD 90 per barrel, there is a significant likelihood of breaching the USD 100 mark if the conflict further intensifies in West Asia.

Potential Impacts on the Indian Economy

Chowdhury identifies five potential impacts of the Iran-Israel conflict on the Indian economy:

  1. Delayed Rate Cuts: Heightened geo-political risks and uncertainty may delay decisions by central banks like the Federal Reserve and Reserve Bank of India (RBI) to cut interest rates. This implies that interest rates could remain higher for longer periods.
  2. Oil Subsidy and Prices: Oil Public Sector Undertakings (PSUs) may face higher under-recoveries until the crude oil price hikes are reflected in petrol, diesel, and LPG prices. The oil subsidy bill is expected to surpass the interim budget for FY25. Continued price rises may lead to further pass-through after elections.
  3. Impact on Oil Derivatives: Prices for oil derivatives are likely to increase, affecting the operating margins of sectors such as petrochemicals, specialty chemicals, and paints.
  4. Rising Shipping Costs: Further increases in shipping costs could raise the prices of imported goods, consequently driving up wholesale inflation.
  5. Slowdown in Exports: Short-term merchandise exports to West Asia may decelerate due to the escalation in conflict.

Economic Outlook Vulnerability

Chowdhury warns that the forecasted GDP growth and retail inflation for FY25 (6.7% and 5.0% respectively) could face revisions if the Iran-Israel conflict escalates further. The economic repercussions of prolonged military action between the two nations could reverberate across global markets, necessitating vigilance and adaptive measures from policymakers and stakeholders alike.

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