Strait of Hormuz: How its closure may impact stocks, Indian economy

The Iranian Parliament has approved a motion to close the Strait of Hormuz, a critical waterway for the global energy trade, pending further approvals. This potential closure poses significant risks to global markets, with about 30% of the world's oil trade and 20% of global LNG trade passing through the strait.

According to Elara Securities, if the closure proceeds, oil prices are expected to "surge and remain sustainably above $90/bbl levels." This scenario poses a major challenge to economies worldwide, especially those heavily reliant on oil imports. For India, a USD 10 increase in Brent oil prices could elevate the trade deficit by 20-30 basis points of GDP.

The potential closure of the Strait is also anticipated to affect inflation. If the price increase passes through to consumers, inflation could rise by approximately 30 basis points. However, the reversal of the excise duty hike of INR 2/litre could mitigate this impact, although the probability of such a pass-through remains low. Additionally, with overall food prices remaining benign and India's service exports still strong, the inflation outlook remains manageable.

Elara further highlights that the closure could escalate the Middle East conflict, exacerbating already volatile market conditions. "If the blockade materializes, the Middle East conflict is bound to escalate," Elara said, suggesting that geopolitical tensions could further destabilise oil supplies.

The impact on India's energy imports is significant, with Oil & Gas Analyst Gagan Dixit noting that approximately 40% of India's crude oil imports in FY25 came through this route. Additionally, 53% of India's LNG imports originated from Qatar and the UAE, according to the International Gas Union.

Global freight costs have also been affected, rising significantly as a result of the uncertainties around the Strait of Hormuz. The Shanghai to Jebel Ali route has seen costs increase by 55% month-on-month, indicating a broader impact on global shipping and logistics costs.

Looking ahead, the market could experience a "kneejerk negative reaction" across risk assets, with positive movements in oil and gold prices. Historically, oil prices have peaked within a month of a crisis onset, according to Elara Securities. The resolution or continuation of these tensions will significantly influence future market dynamics.

In India, the situation demands careful monitoring of developments related to the Strait, global fertiliser prices, and shipping costs, which could affect the import bill in coming quarters. Strong foreign exchange reserves may help contain major risks to external accounts, while domestic conditions could keep inflation at manageable levels for the Reserve Bank of India. A recent notification from the Oil & Gas Ministry indicates oil marketing companies have supplies of several weeks, which is likely to contain the downside. Additionally, analysts suggest that every $10 per barrel rise in crude oil prices could reduce gasoline margin by INR 5.5 per liter, affecting the profitability of oil marketing companies.