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The escalation of the Israel-Iran conflict, marked by the reported killing of Iran's Supreme Leader Khamenei, is set to impact Indian equity markets through trade flow disruptions and a spike in crude oil prices.
According to a report by Bernstein, while India's direct economic exposure to Iran remains limited, with bilateral trade at roughly USD 1.7 billion annually, the broader regional instability poses a significant risk. "For India, the real risk stems less from direct ties with Iran and more from the possibility that an escalating conflict disrupts the wider region," the report stated. The vulnerability is most acute in the energy sector. India, as a major crude importer, faces substantial fiscal pressure from rising oil prices. The Bernstein report noted that a "USD 10 per barrel increase in oil prices translates into roughly USD 12-13 billion of additional annual import costs." Furthermore, the report warned that a USD 30 per barrel move from current levels "could shave more than 70 basis points off GDP growth." Supply chain risks are also heightened, particularly concerning the Strait of Hormuz. The report stated that, "With 50% of India's oil imports being shipped through the Strait of Hormuz, its closure raises a serious risk for OMCs. Key non-oil linkages add to the risk. Non-oil exports to MENA routed via the Strait of Hormuz, estimated at roughly USD 40-50 billion, could face temporary disruption". The report added that several Indian infrastructure and EPC players with active construction projects across the region "are likely to see delays." The duration of the conflict remains the primary variable for market stability. With reference to recent conflict data, the report suggested that "most conflicts over the last 6-7 years have not had a meaningful impact on markets beyond a week". However, the report cautioned that a "prolonged escalation could plausibly push the market below" the 24,500 level on the Nifty. The larger macro concern, the report highlighted, is a "renewed burst of inflation" that could delay interest rate cuts and crimp domestic consumption. While the government may initially shield households by absorbing part of the crude shock, Bernstein suggested this "constrains budget headroom and risks crowding out domestic capex." "The duration and trajectory of the conflict are inherently hard to forecast, so we are cautious on segments most directly exposed to oil and regional dislocation," the report noted. (ANI)
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