Iran’s missile offensive on Israel over the weekend, in retaliation to attacks on its own embassy in Syria, has stoked the embers in the Middle East. While it is as yet unclear if this will escalate into a wider conflict, disruptions in shipments through the Strait of Hormuz look quite likely. This can add new legs to the recent rally in global crude oil prices, which after slumping on recession worries through 2023, have rallied over 25 per cent this year to over $90 a barrel last week.

It was only last week that the OPEC decided to keep its output cuts in place until June, after projecting improved global demand growth of 2.25 million barrels per day through 2024. The industrial metals complex — mainly copper, nickel, zinc and silver — has been upbeat in the last few weeks too, after positive March PMI (Purchasing Managers Index) data from Eurozone and China. Gold is ruling at a lifetime high too, though for a different reason. Wary of a snowballing US debt crisis, central banks led by China have been shoring up their gold reserves to stealthily diversify from the dollar. All this has resulted in the Reuters-CRB Commodity Index rising 18 per cent this year, ruling at levels last seen when the Russia-Ukraine conflict erupted in 2022.

The cocktail of factors driving the commodity rally make it difficult to gauge if this is a structural reversal or a short-term move. But the spike, even if it lasts a few months, will have significant economic implications for India. For one, it can put paid to expectations of a reversal in policy rates from the second half of this year. In recent monetary policy meetings, the Reserve Bank of India (RBI) has said that it would like to bring the CPI (Consumer Price Index) inflation print down to 4 per cent on a durable basis. In its latest policy meeting, RBI made a benign inflation forecast of 4.5 per cent for FY25. But resurgent commodity prices could threaten this forecast. Should inflation remain elevated, RBI may also be reluctant to ease up on domestic liquidity and prefer to stay with its ‘withdrawal of accommodation’ stance. Two, a shift in the global inflation outlook can moderate capital flows into India’s stock and bond markets. Emerging markets including India have been attracting copious portfolio flows since last November, when US treasury yields cooled off to 4 per cent levels on Fed rate cut hopes. US yields are now back to 4.5 per cent, with Fed rate cut expectations being hastily recalibrated. A persistent spike in energy prices can reverse hard-won gains in India’s current account deficit and the rupee.

Finally, geopolitical tensions and commodity prices can interrupt India’s stock market rally. Given that Indian companies are net importers of industrial metals and feedstock, the prospect of higher input costs will require the market to tone down its expectations for a 15 per cent earnings growth from Nifty companies in FY25. But this may not be such a bad thing, as current valuations and earnings estimates appear a tad too optimistic.