US attack on Qassem Soleimani to hit India's economic recovery, say experts

A surprise air-strike by the US military that killed Iran Revolutionary Guards' commander Qasem Soleimani on Friday escalated tensions between Washington and Tehran. According to the US Department of Defence, President Donald Trump had ordered the strikes "in a decisive defensive action to protect US personnel abroad".

"General Soleimani was actively developing plans to attack American diplomats and service members in Iraq and throughout the region. General Soleimani and his Quds Force were responsible for the deaths of hundreds of American and coalition service members and the wounding of thousands more," Pentagon said in a statement.

The strike, which follows a rocket attack days earlier that had killed an American contractor working in Iraq, occurred at Baghdad's international airport in Iraq. The deputy chief of Iraq's Hashed al-Shaabi paramilitary force was also killed in the attack.

Subsequently, Brent Crude Futures surged over 3 per cent to trade at $68.25 per barrel-mark. The West Texas Intermediate, too, gained 2.71 per cent to $62.84 per barrel. In the forex market, the rupee depreciated to a one-month low of Rs 71.61 against the US dollar.

Oil-related stocks, too, declined at the bourses. Oil-marketing firm Hindustan Petroleum (HPCL), for instance, declined 2.5 per cent to Rs 262.85 on the BSE, while Bharat Petroleum (BPCL) dipped 1.6 per cent to hit an intra-day low of Rs 479.4. Reliance Industries, Indraprastha Gas Ltd (IGL), and Indian Oil Corporation (IOC), too, slumped up to 0.66 per cent.

In comparison, Asian shares, including Indian markets, were trading in the red. The S&P BSE Sensex slipped over 118 points, or 0.28 per cent, to 41,508.21 at 11:30 am. Meanwhile, MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.26 per cent, and China’s CSI300 index lost 0.25 per cent.

WHAT SHOULD INVESTORS DO?

Analysts see the development affecting India's economic recovery in the short-term.

"If the tensions persist for a few months, the Indian economy may take a hit again as high crude oil prices will stoke inflation... If Brent Crude hits $80 per barrel-mark, inflation will begin rising and margins of corporations may be negatively affected," says G Chokkalingam, founder, Equinomics Research & Advisory.  He advises investors to stay cautious for a few weeks and monitor the situation.

Narendra Solanki, Head, Fundamental Research at Anand Rathi Shares and Stock Brokers, echoes similar views and says that rising yields, on the back of concerns over inflation, in the short-term could negatively impact India.

"Short-term traders can benefit from the volatility in the market even as we see no long-term impact... I would advise investors to stay put in their investments and wait to see how Iran reacts to the situation," he says.

Ajay Bodke, chief executive officer, at Prabhudas Lilladher, however, expects Iran to retaliate which could send the crude oil prices soaring further.

"Iran could strike either directly or through its numerous proxies in the region in countries like Iraq, Yemen, Syria, Lebanon etc with an intention to cause massive damage to the US and its allies in the Gulf like Saudi Arabia, UAE, Kuwait. It may also aim at causing massive disruption of supply routes through the Persian Gulf or strike at key oil installations besides striking US military and or civil interests in the Gulf and beyond," he says.

He sees safe havens like gold, Swiss Frank, and Japanese Yen rising in the near-term, while expects the emerging market currencies to remain under pressure.

Notably, gold prices climbed to a four-month high on Friday as tensions mounted in the Middle East. Spot gold hit its highest since Sept. 5 at $1,540.60, and was up 0.7 per cent at $1,539.04 per ounce, as of 10:38 am. US gold futures gained 0.9 per cent to $1,541.30 per ounce. Besides, the dollar eased 0.4 per cent to 108.14 against the yen, news agency Reuters reported.

"Indian bond yields need to be watched as any FII outflows due to rising risk aversion may spark a sell-off there leading to rise in bond yields," he says.

Yogesh Patil, Senior Research Analyst, tracking Oil & Gas sector at Reliance Securities, feels that Brent Crude could hit $75 per barrel-mark in the near-term if Iran chooses to retaliate as out of total crude/ LNG travel through Strait of Hormuz, 80 per cent of crude and 69 per cent of LNG is exported to Asian countries (till Nov’19 end).

As for India, which has started importing more crude from Saudi Arabia and Iraq after US sanctions on Iran crude oil export, Patil says higher crude prices would lead to a fall in marketing margins of BPCL, HPCL, IOCL, and RIL

"Oil PSUs (BPCL+HPCL+IOCL) are heavily depend upon the crude supply from Saudi and Iraq. In OMC’s crude basket, 24 per cent/ 19 per cent of crude is sourced from Iraq / Saudi from Jan’19 to Nov’19, while Reliance Industries also imported nearly 38 per cent of the total crude from these two countries. However ISPR (Indian Strategic Petroleum Reserves) maintains an emergency fuel store of total 36.92mn bbl of strategic crude oil enough to provide 8 days of consumption. Higher crude prices to lead a fall in marketing margins (petrol/diesel). Every $1/bbl rise in crude prices to lower marketing margins by approximately Rs 0.45/lt (at constant currency)," he says.

The brokerage has 'Reduce' recommendation on BPCL, while maintains 'Hold' on Petronet LNG as any tension or closure of  Strait of Hormuz can lead to LNG supply disruptions to Petronet LNG