How the Israel-Hamas war has thrown Indian markets out of gear

At a time when the world is already grappling with high interest rates and inflation, the war between Israel and Hamas is adding fuel to the fire of rising crude prices. As a result, it may put additional burden on countries like India that are susceptible to imported inflation.

Market watchers believe the impact of the war on the markets is likely to be soft, but not nil. Anand Shah, Head of PMS and AIF Investments at ICICI Prudential AMC, says, “The long-term impact of the Israel-Hamas war on Indian equity markets is likely to be muted. But, it is marginally negative in the short-term, considering the country’s dependency on imported oil and gas”. Per CMIE’s Economic Outlook, petroleum products accounted for nearly 30 per cent of India’s total import bill in FY23; it stood at 27.53 per cent in FY20.

Shah adds that if the conflict escalates and energy prices remain high, it could keep inflation high, leading to increased interest rates for longer. Elevated inflation for longer can potentially depress equity market valuations globally.

Domestically, the benchmark BSE Sensex declined 0.56 per cent, or 366 points, to close at 65,629.24 on October 19, 2023 from 65,995.63 on October 6. Meanwhile, crude oil prices climbed over 9 per cent to $92.4 per barrel between October 6 and 19.

Sunny Agrawal, Head of the Fundamental Research Desk at SBI Securities, believes central bankers globally—who are struggling to contain high inflation, and the narrative of “high crude prices stoke inflation, and engender higher-for-longer interest rates”—have made investors nervous about their next move.

Agrawal says that for India—that imports around 80 per cent of its crude requirements—any spike in crude prices (above $95 per barrel) may put pressure on oil marketing companies. “High crude prices also stoke inflationary pressure on sectors like cement, paints, airlines, chemicals,” he says, adding that the ongoing conflicts also have the potential to push defence budgets across the world. “Domestic defence firms are likely to be the key beneficiaries,” he says.

There are also fears that the recent hostilities may impact various sectors, including railways, ports, oil and gas, and aviation in the medium-term if the situation persists. For instance, the planned implementation of the India-Middle East-Europe Economic Corridor (IMEEC) by sea and rail route might face delays, and impact domestic firms too. “Several domestic railway players were supposed to bag a large chunk of orders for the creation of the mammoth rail infrastructure. Significant delay in the implementation of the project could potentially hamper the earnings growth prospects for railway players in the medium-term,” says Agrawal.

@iamrahuloberoi