Andy Mukherjee: From oil and gold to capital flows and fertilizer, how the Iran conflict could rattle India’s economy

Past conflicts in the Middle East typically hit India at the gas station. This time, the risks transcend oil, threatening everything from smartphone exports to New Delhi’s fragile finances.Flames have reached the United Arab Emirates, India’s second-largest electronics export destination after the US. Beyond being an entrepôt for regional trade, Dubai and Abu Dhabi are wealth hubs for the Indian elite.

Additionally, nine million Indians work in the Persian Gulf, providing critical remittances. As Iran vows retribution for the killing of Ayatollah Ali Khamenei by the US and Israel, both migrant labourers and affluent professionals are on edge.Oil trade through the Strait of Hormuz—conduit for half of India’s energy imports—is at a standstill. A prolonged blockade could widen the current account deficit and ignite inflation.

Shipping channels are increasingly perilous; after missile or drone debris caused fires at Dubai’s Jebel Ali berths, an association of Indian rice exporters warned of soaring freight and insurance costs.India’s vulnerability is the exchange rate. The rupee, the worst-performing Asian currency, has tumbled 9% against the dollar over the past two years to about 91.5. This has happened even with the greenback losing ground elsewhere.

While weak domestic demand and soft commodity prices have kept inflation in check, the calm may end abruptly. Were the rupee to edge toward the psychological cliff of 100 to the dollar while oil races toward $100 a barrel, the Reserve Bank of India may have to raise interest rates. A higher cost of capital could delay a long-awaited revival of private investment.Since the situation is grave enough to stall the global economy, India could be hopeful of an early resolution.