DBS Bank’s Sameer Karyatt on how the US–Iran conflict could impact the Indian economy

Rising geopolitical tensions amid the conflict between the United States and Iran are affecting the global markets. Crude oil prices have moved up, emerging market currencies are under pressure, and concerns about inflation are increasing again. For a major oil importer like India, a prolonged conflict could create several economic challenges, including a wider current account deficit, pressure on the rupee, and high interest rates.
 
In this interaction with BT, Sameer Karyatt, Managing Director and Head of Trading at DBS Bank India, explains how the geopolitical turmoil could reshape India’s macro-outlook, what it means for inflation, interest rates and foreign investor flows, and which sectors may face the biggest risks if the conflict persists.
 
 
Q) How is the ongoing US–Iran conflict reshaping India’s macro-outlook, especially in terms of inflation, current account deficit, and market volatility; and which sectors are most at risk if tensions persist?
 
Sameer Karyatt: If the conflict continues for an extended period, this could result in the current account deficit widening to 2–2.5% of GDP, a deterioration in the fiscal deficit by 0.5–0.7% of GDP, and an increase in inflation of approximately 100–150 basis points. The manufacturing and hospitality sectors are expected to be impacted due to supply-side disruptions.
 
Q). With inflation still a concern globally, do you think the worst is behind us, or should investors prepare for more surprises ahead?
 
Karyatt: Global inflation is a concern, driven by commodity prices that are expected to stay above pre-war levels. This environment presents stagflationary risks, characterised by slower economic growth coupled with elevated inflation. Ongoing conflict is likely to sustain pressure on energy prices, potentially prolonging the period of high inflation.

Q). The rupee has fallen to record lows amid rising oil prices and global uncertainty. Do you see this as a temporary reaction to the US–Iran conflict, or the start of a longer-term depreciation trend for India?
 
Karyatt: The Reserve Bank of India Governor has indicated that a 3% depreciation of the Indian rupee is embedded in the country’s economic fundamentals. Given the current global macroeconomic environment, marked by sustained pressure on India’s current and capital accounts, we expect the INR to exhibit structural weakness over the medium term.
 
Q). Do you see interest rates in India peaking soon, or could they stay higher for longer? What does that mean for EMIs and savings?
 
Karyatt: The trajectory of interest rates in India will be closely linked to the duration of the conflict. A prolonged war would significantly increase the likelihood of higher interest rates. This, in turn, would lead to a rise in EMIs.
 
Q). Foreign investors have been pulling money out of Indian markets quite sharply. What is driving these flows right now, and should retail investors be worried about sudden FII outflows?
 
Karyatt: Foreign Portfolio Investor (FPI) investments are driven by two primary objectives: capital gains and net interest income. Both objectives are facing challenges in the current macroeconomic environment. Elevated crude oil prices and inflationary pressures have led to rising yields, thereby reducing the potential for capital gains. Concurrently, high hedging costs are diminishing net interest income, which in turn erodes overall returns. If these elevated hedging costs persist, it will become considerably more expensive for FPIs to maintain their investments.