Nifty: What’s the impact of Iran-Israel conflict on India

Investing.com -- The ongoing conflict between Iran and Israel has emerged as a fresh risk factor for India, exposing vulnerabilities despite minimal direct trade ties. 

Analysts at Bernstein report that India’s trade with Israel stands under $4 billion, while its trade with Iran totals about $1.6 billion. 

Crude imports from Iran, once valued at $12 billion in FY19, have ceased entirely due to sanctions.

The primary concern centers on the Strait of Hormuz, a strategic choke point where 20% of global oil supply transits. 

More than 50% of India’s crude oil imports and nearly 70% of its natural gas imports rely on this route. 

Bernstein warns that any disruption here could lead to severe supply shocks. Iran has threatened to block the strait, though historically such threats have not materialized fully.

Following the conflict’s escalation, Brent crude prices surged 16% in ten days, rising from $60 to nearly $75 per barrel. 

Bernstein notes that while past shocks, such as the Russia-Ukraine war and the US invasion of Iraq, caused prices to stay elevated for months, the duration of the current spike remains uncertain. However, a prolonged conflict could push crude above $100 per barrel.

India’s limited alternatives exacerbate the risk. Saudi Arabia and the UAE offer pipeline routes bypassing the strait with capacities of 5 million and 1.5 million barrels per day, respectively, but these are insufficient to cover broader regional needs. 

Imports from Iraq, Qatar, Bahrain, and Kuwait, accounting for 28% of India’s crude and about 42% of its natural gas imports, remain fully dependent on the Strait of Hormuz.

Higher crude prices would directly impact India’s current account deficit and currency stability. 

The rupee has already weakened to 86 indian rupees against the dollar, and further depreciation toward 88 rupees remains a possibility if tensions persist. 

Bernstein estimates that a sustained $10 rise in crude prices over a quarter could add 0.11% of GDP to India’s current account deficit.

The conflict could also strain India’s defense procurement. Israeli defense exports may face delays due to domestic disruptions, forcing India to consider alternate, potentially costlier, suppliers. 

This shift could accelerate domestic defense production but may also test the innovation capabilities of local public sector units.

Airspace restrictions present another challenge. With Iranian and Pakistani airspace closures, Indian carriers flying to Europe face longer routes, driving up fuel, labor, and maintenance costs. 

Bernstein estimates a 15% increase in costs for affected flights, squeezing profitability for airlines heavily exposed to international routes.

Despite these risks, Bernstein maintains that India’s macroeconomic fundamentals remain stable in the short term, supported by controlled inflation, favorable monsoon forecasts, and recovering domestic demand. 

The Nifty year-end target remains unchanged at 26,500. However, Bernstein cautions that prolonged geopolitical instability could jeopardize this outlook by fueling imported inflation and currency depreciation.