Middle East War Impact: Oil, Gold, Rupee & Global Markets

WAR IS BACK IN THE MIDDLE EAST / WEST ASIA

We delayed the report by a day for a simple reason. With the US and Israel having launched an all-out attack on Iran, the impact on commodities was obvious. As Iran has responded by firing at US installations in neighbouring countries and on Israel, it could be the start of a long battle of attrition. Iran fights attrition wars quite effectively as we saw through the decade of the 1980s. That could mean more uncertainty for commodity prices.

While the attacks on Iran were expected, the actual onslaught happened on Saturday. On Monday, the impact on the commodity prices was quite apparent. While oil prices showed the fear factor, gold and silver saw signs of safe-haven buying. While the dollar index hardened on dollar demand, the USDINR dipped sharply, which is not surprising considering the spike in oil prices. For now, the world gets into an uncertain week.

PANIC IN OIL, SAFETY IN PRECIOUS METALS

The table below captures the gist of how the financial metrics moved in the week; and why?

Here is a look at the item-wise trend of the key macro metrics pertaining to India and the globe and how it could impact the macro story.

CRUDE OIL IS THE BIG STORY OF THE WEEK

While any problem in the Middle East is likely to impact Indian oil costs, this time it is more acute. India had promised the US to buy less of Russian oil. In February, nearly 50% of India’s crude imports transited through the Straits of Hormuz. With that route blocked, Middle East oil will have to take a circuitous route; adding to freight and insurance costs. For India, the problem is not too desperate, with an inventory of 74 days, plus the leeway to fall back upon Russian floating cargoes. However, a spike in oil prices is likely to directly hit the trade deficit and the current account deficit.

WHAT HAPPENS TO THE INDO-US DEAL

The euphoria over the Indo US trade deal is more or less done and dusted. After the US Supreme Court decision, even India does not see too much value in agreeing to the stiff terms set by the US. That means, the restrictions on Russian oil may not formally stand any longer. For India, that is a blessing in disguise, as it can use the Chennai Vladivostok Maritime Corridor and avoid the hassles of the Straits of Hormuz.

NRI PURCHASING POWER WOULD BE ANOTHER CHALLENGE

These are early days in the war so the impact is not too steep. However, the longer this battle of attrition continues, the more the risks to the Middle East. India has one of the largest armies of NRI population across Middle East nations like UAE, Saudi Arabia, Oman, Kuwait, Qatar, and Bahrain. They are not only big remitters of NRI deposits to India, but have also been aggressive real estate investors in higher end properties in India. That sector could see a demand slump if the skirmishes go on for too long.

WILL INDIA BOND YIELDS WILL STAY ELEVATED?

India bond yields on the benchmark have been in the range of 6.7% for quite some time now. The reason being the pulls on bond yields. For example, the gross borrowings for FY27 is pegged at ₹17.22 trillion, which is much higher than last year. That has kept yields under pressure. The other factor has been the spike in inflation due to shift in the base year.

There is one more problem that India would be worried about. Weak USDINR is creating a new risk of imported inflation into India. As freight costs and insurance costs go up, part of these hikes would get transmitted into Indian inflation through the rupee. That is something to be watched for, especially the impact that oil prices have on domestic inflation.

GOLD AND SILVER; SAFE HAVEN PLUS INDUSTRIAL DEMAND

Gold has rallied since the war started to a high of $5,419/oz, but tapered by nearly $100 from there. It is still below the recent peak of $5,595/oz, before the correction began about 3 weeks back. The structural bull case remains intact for gold as a safe haven; but silver saw heavy selling on Monday despite the geopolitical risks. Clearly, the silver market looks too overcrowded and there is an aversion to be caught on the wrong side of the trade. Also, the gold silver ratio is too much in favour of silver and a sharper correction is likely. Typically, amidst this geopolitical risk, investors are likely to prefer gold over silver as a safe haven bet.

LAST WORD – KEY TAKEAWAYS FOR INVESTORS THIS WEEK

Here is summing up the metrics for the week.

1. For now, the markets are betting that the war in the Middle East should end soon, but the real challenge will be if it becomes a long battle of attrition.
2. Oil prices are up due to concerns over Straits of Hormuz. Iran is unlikely to continue that for too long, considering they need the support of their neighbours in the Middle East.
3. Rupee has become vulnerable due to oil prices. However, another concern is the NRI deposit and remittance flows from the Middle East, if this war continues.

A short war will not impose a huge cost for India and the world. Longer it continues, Iran may make more desperate attempts to create bottlenecks. That is when the problem could really become a global supply chain issue.