<p>The conflict in the Middle East can go either way. On the one hand, Israel would seek the complete annihilation of the Hamas movement in Gaza, involving a prolonged war in an urban setting with collateral damage. On the other it would, under pressure from its Western allies specifically America, negotiate a deal. Political opinion in Israel is understandably charged, but as the war progresses with a full-fledged ground attack leading to a severe loss of human lives, it is just possible that the mood may begin to temper. Currently, the way things appear, Iran and its proxies in Lebanon and Syria have stayed out of the conflict. Apart from a few artillery exchanges on Israel’s border towns, their reactions have been muted. This is possibly the result of two things. First, is the dispatch of an American naval fleet capable of inflicting serious damage to Iran. Second, there is evidence to suggest that Iran itself was taken by surprise by the actions of Hamas terrorists. Ultimately, everything will depend on the extent of American support towards the Israeli war effort. President Biden, despite ideological differences with the current government in Tel Aviv led by Benjamin Netanyahu, has stood like a rock behind its friend. As it happens, Mr Biden and Mr Netanyahu have a strong personal rapport, so America’s ability to influence Israel remains strong.</p><p>If the war were to escalate, commodity prices, specifically oil, would be affected. The World Bank suggests that in the worst scenario, 6 to 8 million barrels of oil could evaporate from the marketplace, leading to a spike in crude to a range between USD 140 to 157 a barrel. Surprisingly, oil markets have remained calm, with only a moderate 6% increase in the wake of the conflict. Our central forecast is that oil will linger in the region of USD 80 to 95 per barrel. As it starts approaching the higher end of this range, America would undoubtedly put pressure on Arab states to increase production, considering the unusual set of circumstances. The oil-producing monarchies of the region depend completely on American security guarantees and must understand that if the conflict were allowed to escalate, they would eventually get soaked in. Despite the recent tête-à-tête with Iran, Saudi Arabia and the Shia Republic have very different interests and ideologies. In so far as the impact of the conflict on India is concerned, strategy planners need to recognise that commodity prices may not remain subdued endlessly. A USD 10 rise in the oil price will affect India’s GDP growth by 10-20 bps. Inflation, too, will rise as oil is a critical input in both the manufacturing and agricultural sectors. This would affect domestic consumption.</p><p>The Reserve Bank, going forward, will remain hawkish in its monetary stance and earlier predictions of a rate cut are unlikely to happen in a hurry. The RBI needs to manage inflation expectations and would therefore be cautious in its policy outlook. The other worry is the effect of war-related expenditure on America’s balance sheet. Currently, US debt, at USD 33.5 trillion, is edging up every day. The disagreement in Congress that, had simmered over the past few months, may pop up again with a combative stance from the Republican establishment. That could derail funding to a Democratic administration. With two sets of wars to finance, America will continue to endure fiscal consequences. This cannot be construed as good news for inflation in the domestic economy, which we firmly believe will extend for a long time.</p><p>As economic uncertainties linger investors, as per historical practice, will switch to gold and a rally is likely for the coming 6 months. Gold has jumped by about 8% over the past few weeks. In conclusion, strategy planners should be prepared for two scenarios. The first is an end to the conflict over the coming weeks, which will settle markets. Second, is an extended war leading to serious disruptions in global demand. Stock markets in India have already corrected, and we suspect further corrections to happen in the weeks ahead.</p>
<p>The conflict in the Middle East can go either way. On the one hand, Israel would seek the complete annihilation of the Hamas movement in Gaza, involving a prolonged war in an urban setting with collateral damage. On the other it would, under pressure from its Western allies specifically America, negotiate a deal. Political opinion in Israel is understandably charged, but as the war progresses with a full-fledged ground attack leading to a severe loss of human lives, it is just possible that the mood may begin to temper. Currently, the way things appear, Iran and its proxies in Lebanon and Syria have stayed out of the conflict. Apart from a few artillery exchanges on Israel’s border towns, their reactions have been muted. This is possibly the result of two things. First, is the dispatch of an American naval fleet capable of inflicting serious damage to Iran. Second, there is evidence to suggest that Iran itself was taken by surprise by the actions of Hamas terrorists. Ultimately, everything will depend on the extent of American support towards the Israeli war effort. President Biden, despite ideological differences with the current government in Tel Aviv led by Benjamin Netanyahu, has stood like a rock behind its friend. As it happens, Mr Biden and Mr Netanyahu have a strong personal rapport, so America’s ability to influence Israel remains strong.</p><p>If the war were to escalate, commodity prices, specifically oil, would be affected. The World Bank suggests that in the worst scenario, 6 to 8 million barrels of oil could evaporate from the marketplace, leading to a spike in crude to a range between USD 140 to 157 a barrel. Surprisingly, oil markets have remained calm, with only a moderate 6% increase in the wake of the conflict. Our central forecast is that oil will linger in the region of USD 80 to 95 per barrel. As it starts approaching the higher end of this range, America would undoubtedly put pressure on Arab states to increase production, considering the unusual set of circumstances. The oil-producing monarchies of the region depend completely on American security guarantees and must understand that if the conflict were allowed to escalate, they would eventually get soaked in. Despite the recent tête-à-tête with Iran, Saudi Arabia and the Shia Republic have very different interests and ideologies. In so far as the impact of the conflict on India is concerned, strategy planners need to recognise that commodity prices may not remain subdued endlessly. A USD 10 rise in the oil price will affect India’s GDP growth by 10-20 bps. Inflation, too, will rise as oil is a critical input in both the manufacturing and agricultural sectors. This would affect domestic consumption.</p><p>The Reserve Bank, going forward, will remain hawkish in its monetary stance and earlier predictions of a rate cut are unlikely to happen in a hurry. The RBI needs to manage inflation expectations and would therefore be cautious in its policy outlook. The other worry is the effect of war-related expenditure on America’s balance sheet. Currently, US debt, at USD 33.5 trillion, is edging up every day. The disagreement in Congress that, had simmered over the past few months, may pop up again with a combative stance from the Republican establishment. That could derail funding to a Democratic administration. With two sets of wars to finance, America will continue to endure fiscal consequences. This cannot be construed as good news for inflation in the domestic economy, which we firmly believe will extend for a long time.</p><p>As economic uncertainties linger investors, as per historical practice, will switch to gold and a rally is likely for the coming 6 months. Gold has jumped by about 8% over the past few weeks. In conclusion, strategy planners should be prepared for two scenarios. The first is an end to the conflict over the coming weeks, which will settle markets. Second, is an extended war leading to serious disruptions in global demand. Stock markets in India have already corrected, and we suspect further corrections to happen in the weeks ahead.</p>
