The recent conflict in West Asia is expected to impact the Indian economy through several channels, according to Ashwin Patni of Julius Baer. A significant concern is the terms of trade shock, as rising crude prices will inflate India’s import bill, worsening the trade and current account deficit and leading to higher inflation. This inflation may weaken discretionary consumption and negatively affect economic growth.
Additionally, global investor sentiment is affected, with Foreign Portfolio Investors (FPIs) selling significantly in the Indian markets. This selling worsens the capital account situation and puts pressure on the Rupee, further compounding imported inflation. Disruptions in marine traffic could also create shortages of input materials across various sectors.
Despite these short-term headwinds, Patni emphasizes that these shocks are not permanent and the economy will adapt over time. He notes that while the markets reacted positively to recent ceasefire announcements, uncertainty remains regarding the future course of the conflict and its resolution.
