As US-Iran tensions rise, what should be India’s gameplan?

The Middle East has been thrown into chaos in the wake of the US assassination of Iran’s Major Gen Qassem Soleimani, commander of the Quds special forces and the second-most powerful figure after Ayatollah Ali Khamenei. Iran’s vowed to retaliate, and rockets have already landed near the US Embassy in Baghdad. This conflagration could destabilise oil prices at a time when India’s economy is in fragile health. Meanwhile, with the US now an oil exporter, higher prices could help it narrow its trade deficit. India, a major Iranian oil buyer before US pressure forced a halt, purchases two-thirds of its crude from the Gulf, with Iraq the top supplier. Oil prices rose $3 right after the attack and Indian pump prices were hiked Monday. Gold prices have also hit six-year highs and the BSE slid by 800 points on Monday.

As of now, the currency market does not appear too fazed by the crisis. While the rupee declined sharply to 71.8 against the dollar on Friday, it recovered after an initial slide on Monday. Similarly, the dollar index and the Japanese Yen too have not reacted too much on Monday. Equity markets were however nervous and all global indices are trading 1-2 per cent lower. Also, as risk aversion increases in the equity market, foreign portfolio investors tend to pull money out of emerging markets into safe havens. The Reserve Bank should keep its power dry to defend the rupee. Despite the US sanctions against trade with Iran, India’s trade with Iran increased in 2018-19 owing to the waiver on oil from November 2018. Exports went up to $3 billion in 2018-19, which was 33 per cent higher than the previous fiscal, while imports increased 21 per cent to $13.5 billion. After the waiver period ended in mid-2019, oil imports reduced to zero. Exports have been hit as payments are stuck. Basmati and tea exporters fear further difficulties in obtaining payments. It is high time that India created a major strategic reserve for oil to deal with contingencies.

The Iranians played a key role in Afghanistan and had been backers of the Northern Alliance along with India. US Secretary of State, Mike Pompeo, called Pakistan Army Chief Gen Qamar Bajwa to explain US moves. The US also announced it’s resuming training of Pakistan military personnel halted earlier by Trump. In a noteworthy initiative, External Affairs Minister S Jaishankar has reportedly been in talks with the US to defuse the situation in the region. The Gulf is home to over eight million Indians, a source of crucial remittances. So far, Washington has not resumed military aid but there’s an assumption Pakistan will get assistance in some form. It’s not clear what Trump hoped to achieve by the killing, rejected by his two predecessors as too risky for Middle East peace. What’s certain is that we have entered a new stage of brinkmanship.

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