As oil soars and stocks slide, investors in India should focus on equity yields over capital gains

After nine days of denial, the hard reality of an oil shock seems to have hit home. In the second week of joint US-Israel attacks on Iran, crude oil prices have leapt into three digits, with Brent within sniffing distance of $120 per barrel at one point. The oil spike battered stocks across Asia as plumes of smoke began to look like clouds of stagflation on the not-so-distant horizon.

India’s benchmark BSE Sensex slid nearly 3.2% on Monday morning before it recovered a bit to settle around 1.7% down at 77,566. The rupee hit a record low of 92.35 to the dollar. That Iran’s chokehold on Gulf oil supply hasn’t eased bodes ill for our economy.

After all, we import nearly nine of every 10 barrels we consume. Costlier crude would not just soak up extra dollars amid trade headwinds and weak capital inflows, but also fiscal resources if fuel tax cuts are used as shock absorbers for inflation—which may anyway prove hard to quell should energy relief elude us for weeks on end. Our ‘Goldilocks’ run of rapid GDP growth and price stability is clearly at risk, unless the heat of fuel-pump prices in America makes the White House blink and call off the Iran war.

For now, though, the odds of that happening seem long, with the US yet to display signs of material success—say, on easing Iran’s oil clamp—and a defiant regime in Tehran having dug itself in for a battle of attrition. In such a test of pain limits, what each side can endure is a significant factor. Tehran’s deployment of an energy shock, evident in its threat to cargo ships trying to exit the Gulf, has willy-nilly placed oil facilities within the sights of its firepower.