The ceasefire between America and Iran three weeks ago has now broken. US President Donald Trump has made it clear that the ceasefire is over. Subsequently, US forces attacked more than 80 Iranian military targets, while Iran retaliated by targeting US bases in Bahrain and Kuwait. The impact of this conflict is no longer limited to West Asia only. The world’s eyes are on the oil market and the Strait of Hormuz, because in the coming days this will decide which direction the global economy will go. This time is also important for India – not just because of oil, but also because of inflation, rupee movement, LPG prices, stock market and the festival season. The US has signaled the end of the agreement signed in June, and the next 40 days will decide whether the situation will return to normal or tensions will escalate further. If the situation worsens, it can have a direct impact on the pockets of the common Indian citizen.
First Front: Will the prices of petrol and diesel increase?
Brent crude prices had fallen to $69-$70 per barrel during the ceasefire, but as tensions escalated they have crossed $78 per barrel – an increase of nearly 7% in a matter of days. India imports about 85% of its crude oil needs; Therefore, any surge in the international market has a direct impact on the country. At present, the prices of petrol and diesel are stable in the country. Petrol is being sold at ₹102.12 per liter in Delhi; However, energy experts believe that if Brent crude prices remain in the range of $75-$78, the pressure on oil companies to raise prices may increase in the next two to four weeks. If prices reach $85-$90 per barrel, the possibility of fuel becoming more expensive will increase significantly.
Second Front: Why is the Strait of Hormuz a matter of great concern?
About 20% of the world’s seaborne oil trade passes through the Strait of Hormuz. This is the reason why the increasing tension on this sea route has become a matter of concern for the world. India has changed its strategy in the last few years; About 70% of the country’s crude oil now comes from alternative sources outside the Strait of Hormuz – up from about 55% previously – yet experts say the real concern is the supply of LPG and LNG. The supply of these commodities is largely dependent on the Gulf region. Any disruption in shipping traffic through the Strait of Hormuz may impact the cost of cooking gas, CNG and PNG. Additionally, rising costs of marine insurance and shipping may also increase prices of other imported goods.
Third Front: Inflation and impact on rupee
The effect of expensive oil is not limited to petrol pumps only. India has to spend more dollars to buy oil, which puts pressure on the rupee. On Wednesday, the rupee fell by nearly 60 paise to close at 95.56 against the dollar – its lowest in almost a month. Due to weakening of rupee, electronics, edible oil, machinery and other imported goods become expensive, which ultimately increases inflation. The festive season begins in August and September, when market demand usually increases. If oil prices remain high and the rupee remains weak till then, inflationary pressure may increase ahead of the festivals.
Fourth Front: Why keep an eye on the stock market?
The effect of this tension is already visible on the stock market. Sensex fell 1,677 points, investors lost nearly ₹9 lakh crore and India VIX surged nearly 30%. Experts say that in the next 40 days, the market will pay attention to three main things: first, what is the trend of US-Iran tension; Second, what decision does the US Federal Reserve take in July; And third, whether talks between the two countries move forward or break down completely by mid-August. Without any relief on this front, there may be further volatility in the market.
Why are the next 40 days important for India?
Although India has strengthened its position by diversifying its sources of oil imports, it is not completely secure. If tensions ease, the Strait of Hormuz remains open and crude oil prices fall below $75 per barrel, India may get some relief; But if the conflict drags on, disrupting supplies and sending oil prices above $85-90 per barrel, the impact will be beyond just petrol and diesel prices. Pressure may increase on many fronts including LPG, CNG, inflation, rupee and stock market. In short, the conflict in West Asia is spreading thousands of kilometers away, but the next 40 days will decide the price of oil in India, rising inflation levels and the economic burden on the common man.