The frontline indices, Sensex and Nifty 50, lost about 4.5% each this week, marking their worst performance since June 2022. The bulk of the decline came from a 2% drop on Thursday. After three consecutive weeks of positive returns, the indices ended the September 30-October 4 week on a downbeat note, retreating over 5% from their record highs on September 27.
The escalating Middle East conflict, particularly between Israel and Iran, has heightened concerns over potential crude oil supply disruptions from the region, which accounts for one-third of global oil production. This has caused a sharp rise in crude oil prices, adversely affecting net importers like India. Brent crude futures surged by over 10% this week, with a 1% increase on Friday alone.
The conflict has also raised concerns about oil passing through the critical Strait of Hormuz, with fears that Israel may target Iran's major oil fields, potentially pushing prices even higher. While OPEC+'s December supply-output plan has limited the gains, Corporate India remains worried about the rising freight costs and disruptions to air shipping routes.
One-fifth of the world’s crude passes through the Strait of Hormuz. Fears are mounting that Israel could retaliate by targeting Iran's major oil fields, which would likely push oil prices even higher. The only factor limiting the gain in oil prices is the December supply-output plan by the Organisation of Petroleum Exporting Countries and its allies (OPEC+).
The spike in oil prices could impact several sectors in India, including aviation, automotive, and chemicals. ICRA warns that higher crude prices could pose risks to WPI-based inflation and, to a lesser extent, CPI inflation for FY25. Persistent increases in oil prices may also dampen GDP growth and lead to sustained higher interest rates until geopolitical tensions subside.
