As the conflict between Iran and Israel enters the sixth day, there may be new reasons for worry to India. The world’s third-largest consumer of oil, which has so far managed to salvage its growth rate, control inflation, and resist fluctuations in markets, is faced with a potential shortage in oil supply and rising crude oil prices.
A report by the Kotak Institutional Equities, titled, ‘Iran-Israel conflict – just what India did not need’, explains that the “emergence and escalation of the Iran-Israel conflict may have negative consequences for the Indian economy and market”.
The report by Sanjeev Prasad, MD and co-head, Kotak Institutional Equities, cautions against the “actual impact” of the conflict despite India’s relatively stable “macro situation”.
There are elevated fears that the Iran-Israel conflict will disrupt oil supply channels for India, particularly the Red Sea and the Strait of Hormuz.
Goldman Sachs has said that the 45% decline in oil flows through the Bab-El-Mandeb Strait – which connects the Red Sea to the Indian Ocean – in 2025 versus 2023 illustrates the vulnerability of shipping to attacks from Iran-controlled Houthis.
Iran is OPEC's third-largest producer, extracting about 3.3 million barrels per day (bpd) of crude oil.
Brent crude futures settled 25 cents higher at $76.70 a barrel on Wednesday, while U.S. West Texas Intermediate crude rose 30 cents at $75.14.
Crude and Brent oil have seen a steady rise in cost over the past weeks, as tensions are expected to increase between the economic and military superpowers in the Middle East and the West. Goldman Sachs estimated in a June 18 statement that a rise in Brent prices to $76-77 per barrel risks a premium of around $10 per barrel.
If Brent declines to around $60/bbl in Q4, says the bank, assuming there are no supply disruptions, a $10/bbl premium appears justified in light of its lower Iran supply scenario where Brent spikes just above $90.
However, the Kotak report clarified that “India’s economy will not be affected meaningfully by $10-20/bbl higher prices, given the size of the economy.”
Nonetheless, higher oil prices could weaken one of the “central arguments for high valuations” of the Indian market.
Separately, Barclays said on Wednesday that if Iranian exports are reduced by half, crude prices could surpass $100 in the “worst-case” scenario, or rise to $85 per barrel in the very least.
Although the Kotak report has warned that the “emergence and escalation of the Iran-Israel conflict may have negative consequences for the Indian economy and market”, it also highlights that the “rich valuations of the Indian market, sectors and stocks leave very little scope for any negative developments.”
According to it, “the impact on the economy will be felt through higher oil prices, while the impact on the market will be felt through lower earnings and/or lower multiples.”
There is limited room for earnings, fiscal or monetary surprise at the moment, the report adds.
There are also fears that a sharp turn in the oil situation and any further increase in oil prices may eventually weaken India’s macroeconomic position, despite it looking stable at the moment.
Experts said they hoped the government would announce a fiscal stimulus through lower automotive retail prices and/or lower GST rates.
There is a clamour for the markets to factor in a higher cost of capital in the event of a higher geopolitical risk, higher probability of regional conflicts between regional powers and more frequent disruptions to global investment and trade.
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