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    Gesundheit, even as West Asia sneezes

    Synopsis

    Iran's strike on Israel has minor impact on energy market. US cautious on high fuel prices in election year. Central banks may raise rates due to energy price volatility, affecting demand.

    Israeli Iron Dome air defense system launches to intercept missiles fired from I...PTI
    The effect of Iran's strike against Israel over the weekend, in retaliation with the suspected Israeli attack on the Iranian consulate in Damascus on April 1, has been muted in the energy market. This would suggest the market expects a de-escalation of hostilities. Fundamentally, energy demand is weak on account of Western economies and Opec+, which includes Russia, having to go in for deeper production cuts to establish an $80-a-barrel floor for crude oil prices. The US has a lower tolerance for high fuel prices in an election year and would not like to see Russia benefit from a surge. Oil-producing nations in the Gulf, including Iran, are wary of a ramp-up in US production if the conflict were to push crude oil towards $100 a barrel. Besides, energy price volatility would force central banks to keep interest rates higher for longer, with second-order effects on demand.

    Disruption of merchandise trade should, in line with energy supply, be of a limited order. Asia's maritime trade with Europe through the Persian Gulf has already seen some dislocation since Israel's strikes on Gaza. Alternate sea routes and air freight are already in operation. Supply chains in Asia, by and large, appear cushioned from energy and trade dislocation. A weak Chinese economic recovery lends additional stability against possibly deeper trade disruption in West Asia.

    Apart from a flare-up in crude oil prices, India faces turbulence in capital flows on account of higher interest rates and flight to safety in the event of an escalation. Its merchandise trade also has an over-dependence on the Persian Gulf sea route. It would have to lend its voice to global efforts at conflict mitigation to protect its growth momentum and inflation control. The downside risk to inflation is greater than to growth. Core inflation is now well within the tolerance zone. But higher energy prices, if sustained, could work their way in. Meeting medium-term fiscal goals might become more difficult if GoI has to absorb yet another fertiliser price shock.

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