Tehran’s retaliatory attacks on two US bases in Iraq following the killing of a top Iranian military commander last week have put the world on edge. On Wednesday, American bases at al-Asad in Iraq’s Anbar province and Erbil in its northern region were struck by a fusillade of over a dozen missiles launched from Iran. Tehran portrayed it as an act of “self defence", part of its sworn response to the US drone strike that left General Qassem Soleimani dead, and claimed that dozens of US lives had been taken. The US, however, is yet to admit any casualty. US President Donald Trump appeared to downplay the event in a tweet soon after, saying “All is well" and “So far so good". Meanwhile, a Ukraine International Airlines jetliner crashed shortly after take-off from Tehran, leaving no survivors and drawing news attention back to Ukraine, a scandal over ties with which haunts Trump’s presidency. Though Iranian authorities pointed to a “technical fault", suspicions arose over the cause of this crash. The big question, though, is whether West Asia is on the verge of another flare-up of hostilities that could inflame oil prices and singe our economy.

As things stand, both sides could plausibly portray their stated objectives as having been achieved and, thus, take no further action. Yet, markets remained nervous. And, this was not without reason. Although Trump’s initial reaction suggests that Washington wants to glare at Iran and be done with it, if Americans see that body bags are being flown to the US, then the White House may find it politically untenable to let the latest provocation go. In Iran, even as swarms of people bayed for retaliation, Iranian officials reportedly said that Iran did not want war and the country had “concluded" its reprisal. But if the US shrugs off Wednesday’s attack, then Tehran might go after other targets. Unfortunately, what counts as a “proportional response" is often shaped by popular perceptions. Iran may also have bigger ambitions. Having taken credit once for the electoral defeat of a US president—Jimmy Carter in 1980—Tehran might see Trump’s re-election bid as vulnerable to a public humiliation of the US armed forces. Iran’s economy has been reeling under US sanctions imposed after Trump binned a multi-country nuclear deal with Iran. Tehran now looks keener than ever to acquire nukes, but it may also bet that a Trump exit would allow it to revive its oil exports. Either way, the confrontation is at some risk of a military escalation.

For India, a spike in global oil prices caused by a disruption in Gulf supplies will not just push up the country’s import bill, but its knock-on effects will also pressure the government’s finances and complicate the central bank’s task of capping retail inflation. If the Centre opts to keep domestic fuel prices stable, its fiscal deficit will get strained further. If it lets fuel feed inflation, the Reserve Bank of India may have to give up its easy money policy. Either way, the cost of capital in India will rise at a time we can least afford it. Global investors will also revise their risk assessments and, if the rupee suffers too sharp a drop, our capital markets could see outflows. The country has been lucky to have had a benign oil outlook over the past half decade or so, with American shale oil keeping crude prices in check. But New Delhi now needs to be on guard against adverse scenarios.