Sensex tanks 1,832 points amid escalating Middle East crisis, what are the impacts on India?

As tensions escalate in the Middle East, Indian policymakers and businesses are closely monitoring the potential fallout. On October 3, the Indian stock market experienced a significant crash, with the Sensex dropping 1,832 points to 82,434 and the Nifty losing 565 points to 25,231.90. The crisis has contributed to a surge in gold and crude oil prices, with Brent crude rising above $75 per barrel and gold prices nearing record highs.

Crude Oil Prices: India, the world's second-largest crude oil importer, faces the threat of rising crude oil prices due to the conflict. This could exacerbate inflation and increase the import bill. Although India has been importing significant amounts of oil from Russia, it remains dependent on Middle Eastern supplies. Recent data indicates a three-day rise in oil prices, currently hovering close to $75 per barrel, below the RBI’s projected average of $85 per barrel for this fiscal year.

Gold Prices: Gold has seen a surge, driven by Iran’s involvement in the conflict, pushing investors towards this safe-haven asset. As of October 3, 24-carat gold in India stood at Rs 76,250 per 10 grams, up 2% over the past 10 days. Analysts predict further increases, with prices potentially reaching Rs 78,500 to Rs 80,000 in the short term.

Market Impact: The Middle East crisis, along with SEBI's tightened norms on futures and options trading, has led to a broad market sell-off. Investors are concerned about foreign funds pulling out from emerging markets, including India, and increasing exposure to Chinese markets following recent stimulus measures. Upcoming second-quarter earnings reports, starting with major IT companies, will be crucial in setting the market tone in the coming days.

Exports and Logistics: The crisis is expected to impact India’s exports, particularly to the Middle East, and increase freight and logistics costs. Disruptions in key shipping routes like the Suez Canal and the Red Sea have led to longer routes around the Horn of Africa, raising shipping costs by 15-20%. This has significantly impacted profit margins for Indian companies exporting low-end engineering products, textiles, garments, and other labor-intensive goods.

Trade with Conflict-Impacted Countries: India’s trade with countries directly affected by the conflict has also been hit hard. Exports to Israel dropped by 63.5%, to Jordan by 38.5%, and to Lebanon by 6.8%.

As geopolitical tensions continue to rise, Indian policymakers, businesses, and exporters remain vigilant, anticipating further economic challenges ahead.