The Nirmala Sitharaman-led ministry, in its Monthly Economic Reiview for February released on Friday, said that tensions in West Asia have increased uncertainty in the global economy and financial markets, and volatility could remain high for some time.
“The implications of this conflict for India are significant and may be longer-lasting in ways that are not immediately understood,” the report said, adding that there is still considerable uncertainty about how the conflict will eventually end.
A major concern highlighted in the report is the security of the Strait of Hormuz, a crucial route near Iran for global oil shipments. Any disruption in the strait could lead to higher oil prices as geopolitical risks increase.
“If the Strait of Hormuz remains vulnerable to disruption, the geopolitical risk premium in oil prices will inevitably return. If the confrontation ends with a credible shift in the regional balance of power, the international system will gradually absorb the shock, and markets will stabilise. But if the declaration of victory precedes the resolution of the underlying strategic contest, the apparent calm may prove fleeting,” the report noted.
The ministry added that the long-term impact of the conflict will depend on how the regional balance of power changes once the fighting ends. If the situation stabilises in a credible manner, global markets may gradually adjust.
However, it cautioned that if claims of victory come before deeper strategic tensions are resolved, any calm in markets could be temporary.Despite these risks, the Finance Ministry said India’s economic position today is stronger than during previous periods of instability in the Gulf.
“India enters the next financial year with a solid macroeconomic backdrop, unlike during the previous turbulent episodes in the Gulf region,” the report said, indicating that stronger fundamentals could help the country manage potential shocks from energy markets and global uncertainty.