India May Face Fiscal & Monetary Policy Challenges If War Intensifies

India is staring at a multi-pronged challenge to its economy—from inflationary and fiscal pressure to widening current account balance and further moderation in economic growth—if the Israel-Iran war continues for a long period.

- Prasanta Sahu & Sandip Das

A Goldman Sachs report on Sunday said Brent could briefly peak at $110 a barrel if oil flows through the Strait of Hormuz were halved for a month and remain down by 10% for the following 11 months.

India is a net commodity importer, especially oil and fertilizer. India Ratings chief economist DK Pant said the global economy is reeling under the tariff issues, which have already weakened the outlook on global growth, trade and capital flows. A prolonged Iran-Israel war will lead to slower global economic growth, trade and capital flows.

"We have seen oil prices have spiked, Brent crude is approaching $80/bbl and if they remain at this level, it will impact inflation and future direction of monetary policy," Pant said.

The first round (direct) impact of a 10% hike in the price of oil (including currency depreciation and higher freight cost) on WPI will be around 104 bps. The impact on CPI will depend on how the government rejigs its duty structure, he said. "A 10% hike in price of crude and oil products (including currency movement and freight cost) if fully passed on to consumers may lead to a 42-bp increase in retail inflation," he said.