Editorial 1: Why war hasn’t hit markets?
Context
Israel and Iran have been attacking each other, and there is no saying how bad the war situation could get. But India’s stock markets have remained calm.
The situation in markets
- On June 12, a day before Israel first hit Tehran with missiles, the Sensex at the Bombay Stock Exchange closed at 81,691.98. Over the last five days (three trading sessions) the benchmark index has more or less maintained its level.
- According to the US Energy Information Administration (EIA), at the end of 2023, Iran accounted for 12 per cent of global oil reserves, with the world’s third largest proven reserves after Venezuela and Saudi Arabia. Iran also has the second largest reserves of natural gas after Russia.
- However, Western sanctions have ensured that only around 4 per cent of global oil supplies comes from Iran. The primary customer of Iranian oil is China.
- Since the war began, global Brent crude prices have risen by around 11 per cent. This is a significant spike.
Reason for comfort
- Economists and market experts link it to India’s comfortable position in terms of macroeconomics and inflation levels, and to the absence of any significant trade linkages with Iran.
- Concerns could arise if and when Israel targets Iranian oil installations — which it has not done so far.
- As of now, OPEC (the Saudi Arabia-led 12-member Organisation of Petroleum Exporting Countries) is already sitting on higher capacity.
- Concerns may rise on oil prices if Iranian oil installations are hit, and there is a supply issue to China, which may lead to a real spike in crude prices.
- Inflation in India is at a comfortable level, and that is providing comfort to the markets, despite some increase in oil prices.
- India’s macroeconomic fundamentals could be impacted only if there is a significant spike in oil prices, which would inflate the import bill and hurt the fiscal situation, and lead to a rise in wholesale price index (WPI) inflation.
- Experts also pointed out that the buffer provided by the Indian government would likely ensure that even if global crude prices rise, there may not be an immediate impact on retail prices and consumer price index (CPI) inflation.
Inflation under control
- In its monetary policy statement earlier this month, the Reserve Bank of India said that headline inflation based on CPI continued its declining trajectory.
- The softening in overall inflation levels provide much needed comfort to Indian markets. The RBI also projected CPI inflation for FY 2025-26 at 3.7 per cent.
Impact of oil’s price
- A rise in crude prices poses inflationary, fiscal, and external-sector risks for the Indian economy.
- Crude oil-related products have a share of more than 9% in the WPI basket, and therefore, a 10 per cent increase in crude prices may lead to a 0.9 per cent increase in WPI inflation.
- India imports around 85 per cent of its oil requirement. The share of oil imports in India’s total import bill is more than 25 per cent.
- An increase in oil prices impacts the current account deficit, which is the difference between the values of goods and services imported and exported.
- A rise in crude oil prices also leads to an increase in the subsidy on LPG and kerosene, pushing up the government’s subsidy bill.
- Indian equity markets have become far more aligned with global equities over the last two decades. And this impacts consumption. But integration remains weaker in trade, which influences exports and investment.
Financial vs. Trade Linkages in the Economy
- Discretionary consumption and corporate investment are more closely aligned with global growth than essentials and household investment, highlighting the benefits reaped by high-income, financially integrated individuals and firms.
- Conversely, weak export integration—particularly in mid-tech sectors—has limited broader economic gains. This divergence has created two economic groups: one thriving through global financial integration and the other lagging due to weak trade links.
Conclusion
India’s markets remain stable despite global tensions, thanks to strong macro fundamentals, low inflation, and limited trade ties with Iran. However, the economy shows a clear divide.