By Anjan Roy
The preliminary announcement of a truce between United States and Iran is more a psychological boost than actual easing of the hardships arising from the conflict for the global economy, let alone the Indian. True, oil prices are showing some signs of softening, but experts feel it will not go down below $75 for a barrel. But more important would be the supply pipeline.
Shortage of oil on the global markets drove up the prices, sometimes shooting to even $120 a barrel. In the first flush of jubilation over the peace agreement, prices have gone down to $83.55 for a bagel today. But one has to remember it was only $70 per barrel for Brent crude before the hostilities began.
But it is rise in the average oil prices which affected India. The costs went up, in turn pushing the level of domestic inflation. But then, the shortages of oil and gas were playing havoc to the overall psychology.
The Strait of Hormuz handled 20% of global oil movements. But that 20% played a far more upsetting of the oil price equilibrium on the markets. Even after the announcement of a peace framework agreement, the Bank of Japan, one of the most conservative central banks in the world, today increased its basic policy rate to its highest level in 31 years. That is a gauge of the concern in financial circles around the world.
Why are the major players still not really that upbeat?
First of all, there have been false claims of a truce by Donald Trump several times. No details of the truce have been released, but only vague promises of further details by later this week. There are some outstanding issues and details which have not been apparently resolved. What has happened is that cessation of hostilities and the beginning of negotiations.
Secondly, there are no indications of the right of free passages through an international seaway. Before the hostilities began, any ships could sail through the Strait of Hormuz without being harassed or attacked by Iran. Now, Iran, having discovered its choke hold over the seaway, is demanding a fee in other names for passage. In some cases, Iran was sometimes paid very hefty fee for the passage through the seaway.
Indications from the Iranian foreign ministry briefings confirm that they are thinking of charging for maritime services and environmental protections fees. On top, the Iranians are talking of insurance charges for ships passing through. This is a direct hit to the Lloyds of London which traditionally controlled all Maritime insurance. The western financial services could see their wings clipped.
This introduces a new paradigm in the area. Whatever the fees demanded by Iran, it will add to the costs of passage through the strait. India, for one, had insisted that the status of Strait of Hormuz should remain an international seaway for all.
Thirdly, the strait will have to be made navigable as before the hostilities began. Currently, there are over 100 tankers stranded in the waters. These are looking for their passage out. Occasional skirmishes with US or Iran left sailors injured and dead and vessels badly damaged. Unless these waters are made safe for the ships, situation cannot be said to have improved.
The strait was heavily mined by Iran and it is only Iran which can give the lanes the safety for sailing before these are cleared. This could be a stupendous task.
The clearing of the Strait of Hormuz is not hoped to be completed soon, despite US president, Donald Trump, saying the movement through the narrow strip of waters should be open by Friday. The fact remains, that the Strait will have to be cleared by Iran probably, with help from other nations.
Unless that happens, the supplies through the strait cannot be pick up. At best, according to international ship racking data only a handful of ships are moving about. That is a situation far from being normal.
Notwithstanding these caves, the financial markets behaved in their typical responses. The Dow Jones indices have improved and so the regional markets in Asia and India. There lies the rub.
A gyrating stock markets introduces a kind of disequilibrium that is much more difficult to handle than the real economy swings. Even higher oil prices and some shortages in oil supplies could have less destabilising impact than the financial market swings. This is, particularly, an area of concern for India.
Sharp swings in the sack markets resulting in withdrawal of the foreign institutional investors in the Indian market tends to spill over. When the US markets, for example, see sharp fall the FIIs tend to pull out from the merging market economies, typically like India. When that happens the exchange are of the rupee is hit.
Already the rupee is on the threshold of late 90s to a dollar. Any fast withdrawal of FIIs from Indian markets could beat that down further. This is the route through which the effects of financial market instability gets into the domestic economy.
It is not that one should be pessimist at this point of time over the drifts in US-Iran conflict. Only, that India will have to be doubly cautious about the spiralling effects of the ups and downs in the fortunes of negotiations and their impact on the American financial markets. We should put up some ring fences for guarding the domestic economy from the direct thrust of the global storms. (IPA Service)
