Israel-Palestine War: Impact on global economy, India-Israel trade, financial markets

  • The fallout of Israel-Hamas war on the global economy may take time to become clear but would become more severe if the conflict spreads to the rest of the Middle East, especially Iran, which is both a major oil producer and supporter of Hamas.

Ankit Gohel
First Published9 Oct 2023
The US stock futures declined while the Asian markets traded lower on Monday. Safe-haven gold prices rose over 1%.
The US stock futures declined while the Asian markets traded lower on Monday. Safe-haven gold prices rose over 1%.(Image: Reuters)

The global economy, already rattled by elevated inflation, is now facing another geopolitical crisis in the Middle East after the surprise attack of Hamas on Israel and subsequent declaration of war by the latter.

On Saturday, Palestinian militants fired more than 5,000 rockets from the Gaza Strip toward Israel, killing at least 700 people and wounding thousands others, the worst attack on Israeli soil in decades.

In retaliation, Israel formally declared war and approved for “significant military steps”, as the military crushed Hamas militants still in southern towns and intensified its bombardment of the Gaza Strip.

The toll passed 1,100 dead and thousands wounded on both sides, as fighting entered a third day.

Catch Israel-Palestine War Live Updates here

The fallout of Israel-Hamas war on the global economy may take time to become clear but would become more severe if the conflict spreads to the rest of the Middle East, especially Iran, which is both a major oil producer and supporter of Hamas.

“A major channel of impact on the global economy would be via oil prices which have already risen near to $90 level. Further escalation of the conflict towards other Middle Eastern nations which are key oil producers poses a bigger threat and needs a very close watch given that the global economy is currently facing a ‘higher for longer’ interest rate scenario,” said Kanika Pasricha, Economist, Standard Chartered Bank. 

Let us understand the impact of Israel-Hamas war on global economy and markets:

Oil prices boil

Crude oil prices surged sharply on Monday as the tensions escalated in the Middle East, home to almost a third of global oil supply. 

Brent crude rose 3.44% to $87.49 a barrel, while US West Texas Intermediate crude rallied 3.85% to $85.98 a barrel.

However, the crisis is unlikely to pose any major immediate threat to the oil supply unless it further spreads to other countries in the region which could develop into a more devastating proxy war, embroiling the US and Iran. 

Read here: Oil soars as Hamas’ attack on Israel fans Middle East tensions

While there are reports of Iran being involved in the attacks against Israel, any possible retaliation against Tehran could endanger the passage of vessels through the Strait of Hormuz, a vital conduit that Iran has previously threatened to close, analysts said.

“The issue is that if the war persists for long, which is say, even a fortnight onwards, then the oil dynamics will change. Brent had crossed the $90 mark but then retreated. Now we can use the 90 number to be the threshold beyond which there is trouble for the world economy. India can get affected if the price remains high due to further supply disruptions,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

Iran joining the fray can affect the sea routes and push up transport and insurance costs. Higher crude will distort our balance of trade and CAD thus putting pressure on the rupee.

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Inflation

As the crude oil prices surge, the threat of high inflation grasps the global economy again. The United States, India, China and other major economies are big importers of oil and can see high imported inflation if the oil prices remain elevated.

When oil prices rise, the cost of production for various industries and energy costs for businesses and households also surge, driving inflation higher.

High energy prices and new inflationary trends could undermine the efforts of central banks to bring inflation under control. This can see interest rates at an elevated level for a prolonged period. 

Also Read: Bank of Israel to sell $30 billion of forex to stabilise shekel amid war

The concerns over higher interest rates dent outlook for global economic growth. With the US Fed clearly indicating one more hike in interest rates was on the cards and rates can stay elevated for a longer period has dealt a blow to investors' hopes that rate hikes have peaked and central banks could begin thinking about rate cuts.

India-Israel Trade

There is no immediate impact seen in India’s trade with Israel due to the conflict in West Asia. However, it can create supply-side problems if the conflict escalates, analysts said.

India’s exports to Israel account for 1.8% of India’s total merchandise exports led by petroleum products. Israel buys around $5.5 - 6 billion of refined petroleum products from India. In FY23, India’s total exports to Israel stood at $8.4 billion

“Therefore the rupee depreciation is a distinct possibility which will require RBI action. The currency range will shift upwards to the 83-84 bracket in such a case,” said Sabnavis.

On the other hand, India imports machinery, pearls, diamonds and other precious and semi-precious stones from Israel. In FY23, India’s imports from Israel were at $2.3 billion.

Global markets

The Israel-Hamas war has spooked equity markets all over with investors shifting towards safe-haven assets. Investors remain cautious and watchful of the global events with risk-off sentiment grappling the market.

The US stock futures declined while the Asian markets traded lower on Monday. Safe-haven gold prices rose over 1%.

Spot gold jumped 1.2% to $1,853.79 per ounce, while the US gold futures climbed 1.2% to $1,867.80.

Read here: Gold, silver price jumps amid rising Israel Palenstine conflict. Opportunity to buy?

Dollar and Japanese yen also edged higher. The dollar index was last 0.1% higher at 106.33.

“This is a time to be cautious. Investors may refrain from taking big risks. Wait for the developments to unfold. Long-term investors can slowly accumulate high quality stocks on declines,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Meanwhile, foreign institutional investors (FII) are continuously selling due to higher bond yields and high crude oil prices could add more issues.

However, analysts do not see a major immediate impact on the Indian stock market.

“The ongoing conflict in Israel is an unforeseen event impacting the market, and its effects may take some time to be fully absorbed. Monitoring the situation closely, especially regarding potential involvement of other actors like Iran, is essential. The possibility of a third front involving Iran is a significant concern as it could trigger a sharp increase in crude oil prices,” said Santosh Meena, Head of Research, Swastika Investmart.

From a technical standpoint, the 19,300–19,250 range is a critical demand zone for Nifty 50. Until the market stabilizes within this range, it's likely to remain in a sideways pattern, facing a notable obstacle at 19,800. A breach below 19,250 could lead to a healthy correction, potentially reaching the 18,800 level, he added. 

Also Read: Nifty 50, Sensex decline on Israel-Hamas war: 5 factors that weigh on market sentiment

“For short-term traders, it's advisable to exercise caution and not rush into trades. On the other hand, a substantial correction could present an excellent buying opportunity for long-term investors,” Meena said.

Raj Vyas, VP of Research at Tejimandi said he did not think there was any cause of panic as far as the Indian stock market is concerned but the performance would be mirrored as to how the global markets do. 

“At the moment we are not concerned because this Israel-Hamas is an evolving situation and needs to be tracked for a couple of days before we react to it. Since the earnings season will kick start from 11th October 2023, markets will keenly watch the report card and the management commentary to gauge the trajectory going ahead and state elections starting next month,” Vyas said.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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