The ongoing conflict between Iran and Israel has been a significant source of geopolitical tension in the Middle East. The two nations have been at odds for decades, with occasional flare-ups affecting the region's stability. The latest escalation in tensions has raised concerns about the potential impact on the Indian as well as the global economy.
The Conflict: A Brief Overview
The conflict between Iran and Israel is rooted in religious, political, and territorial disputes. The two nations have been engaged in a proxy war, with Iran supporting militant groups like Hezbollah and Hamas, which are hostile towards Israel. The conflict has resulted in economic sanctions, military actions, and diplomatic confrontations, impacting the global economy.
Impact on Oil Prices
The Middle East is a significant producer of oil, with Iran being one of the largest exporters. Any disruption in oil production or transportation due to the conflict can lead to a spike in oil prices. Crude oil prices rose by 1.4% to $77.58 a barrel in January 2023, following tensions between the US and Iran. A sustained increase in oil prices can impact the global economy, particularly for oil-importing countries like India.
Effect on Global Trade
The conflict can disrupt global trade, particularly in the Middle East. The Strait of Hormuz, a crucial waterway for oil transportation, could be at risk if tensions escalate. In 2021, approximately 21% of global petroleum liquids production was transported through the Strait of Hormuz. Any disruption in the flow of oil can impact global trade, leading to increased costs and reduced economic activity.
Impact on Currencies
Geopolitical tensions can lead to wild fluctuations in currency markets. The US dollar, often seen as a safe haven during times of uncertainty, may strengthen against other currencies. When the US dollar strengthens, the value of other currencies like the Indian rupee tends to weaken against it. This can make imports more expensive for India but exports cheaper in foreign markets. This can impact India's trade balance and economic growth.
Effect on Stock Markets
The conflict can also impact stock markets worldwide. Investors may become risk-averse, leading to a sell-off in stocks and a decline in market indices. In 2021, the S&P 500 and the Dow Jones fell by 0.7% and 0.5%, respectively, following tensions between the US and Iran. A prolonged conflict can lead to a decline in investor confidence, impacting economic growth.
Effect on India
India's energy security is also at stake, with around 2 million barrels of crude oil reaching the country daily through the strategically vital Strait of Hormuz. Disruptions to oil transport in this region could lead to supply shortages and drive up domestic energy costs, further exacerbating inflationary pressures and constraining economic growth.
