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Straitjacketed

India’s energy dependence on key geographies keeps it vulnerable to geopolitical shocks. The West Asian crisis and ongoing disruption in the Strait of Hormuz raise significant concerns over India’s energy import availability and heightened price pressures. In case the conflict persists or recurs, the center and/or PSUs may need to absorb the shock to cushion inflation and mitigate growth headwinds. Risk-off sentiments will keep the INR under pressure, while the RBI intervenes judiciously, balancing pressures on FX reserves and the need to maintain banking system liquidity.

Trade: India is heavily trade-dependent (especially imports) on West Asia bloc

GCC + West Asia comprises 19% of India’s goods trade (exports + imports)—the largest bloc in terms of total trade (see Exhibit 1). The bloc has a share of 15% in India’s exports and 21% in India’s imports (see Exhibits 2-3). Exports are concentrated on petroleum products, jewelry, aircraft parts, mobiles, rice and auto parts, while imports are concentrated on crude and products, gold, diamonds, organic chemicals and fertilizers (see Exhibits 4-5).

Import: Price pressures amid availability concerns; select few alternatives

Around 27% of the global oil supply passes through the Strait of Hormuz, with around 89% of this traffic channeled toward Asia. Furthermore, around 20% of the global LNG supply passes through the strait. Around 47% (US$68 bn) of India’s crude and product imports depend on West Asia + GCC, along with around 80% (US$23 bn) of India’s LNG imports being sourced from the GCC (see Exhibit 5). This will have implications for fertilizer availability and prices too (see Exhibit 6). India’s diversification options remain limited, as energy import substitution may be difficult without Russian imports, which risks re-creating frictions with the US. Exhibit 7 underscores the need for a long-term strategy to tie up with global frontrunners (mostly DMs) to create a cushion from geopolitical upheavals (frequent recurrences are now highly probable).

Impact: Moderately negative impact for now, but the slope is slippery

We expect a minimal impact on India’s macro fundamentals in the case of a quick resolution (within 1-2 weeks), though concerns will rise if the crisis lingers or recurs. In the case of continued supply constraints of petroleum and natural gas products (see Exhibit 8-9), we expect external balance erosion, capital outflows, fiscal slippages, inflation pressures and lower growth (see Exhibit 10).

Policy options: Few hard measures may be needed

Based on our demand-supply situation, policy measures could comprise retail fuel price protection and ensuring adequate fuel supply to households, including city gas distribution, even at the cost of lower industrial supply with export curbs on petroleum products amid the unavailability of alternate crude sources or the continued price rise. The RBI will likely intervene judiciously in the INR, keeping the depreciation bias amid concerns around (1) reducing FCA, (2) the net short forward book, though the short-term book improved substantially and (3) maintaining adequate system liquidity (see Exhibits 11-13).

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