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In a serious escalation of political tensions, the American forces assassinated Iran's second most powerful man, the head of their elite Quds force, and perhaps one of their most prolific strategic thinkers - Qassem Soleimani, on orders from the American President. Global market felt the shocks of the move, with Iran's supreme leader promising severe revenge. Unsurprisingly oil jumped sharply as well. In today's post we try to look at the events that led to the move, the options that Iran has going forward, and the implications for oil, inflation, monetary policy, and growth if the worst were to happen.
Why was the Iranian leader assassinated?
The official reason provided by the US government was that the strike was preventative to avoid escalation of conflict, and to "stop a war". However given the extent of the escalation to a relatively low-intensity event of Iraqi protestors hurling stones at the US embassy (which came after the US forces attacked Iran's militia), the most likely reason would be to weaken Iran by removing one of its sharpest and most powerful minds who led their unconventional warfare. It also gives the US a legitimate reason to grow military presence in the middle east as Iran is forced to retaliate over a blatant breach of its sovereignty.
What are the options that lie ahead?
In considering options of possible retaliation, Iran's supreme leader stressed that no amount of retaliation would be sufficient, saying Soleimani's shoe was more important than Trump and his entire cabinet. Given the strong sentiment in the leadership and on the streets, a retaliation from Iran is more or less imminent. There are three broad options in front of them. We try to analyze each in terms of impact, backlash, and their long term goal of getting the US out of the middle east. The first is direct military conflict. Given the military might of the US, this move seems unlikely, since a full-blown war with the US would be virtual suicide. It would also be counter-productive in their efforts to weakening US presence in the middle east since this would give the US government legitimate reasons to deploy more forces there. The second option would be small scale local attacks on installations and military personnel in the middle east through its host of affiliate organizations spread across the region. 'The death by a thousand cuts' approach could see attacks on everything from military installations and bases to military personnel. (Iran's leader has explicitly guided against attacking non-military citizens) Given the sentiment in the Iranian camp, this option seems most likely. The killing of Soleimani would help drive a common anti-America narrative in the middle east and would be something the Iranians could easily capitalize on to mobilize their unofficial forces. The last, and perhaps the most effective (but unlikely given the emotions running) would be the avoiding of military conflict and instead choosing cyber warfare. Given the honed cyber warfare prowess, this would potentially be a way to inflict damage without significant loss of life on either side.
What could this mean for your daily spend, the RBI's policy, and India's growth?
While a full-blown war would have extremely severe economic consequences, even enhanced conflict in the oil-rich region has strong implications for India, which still depends heavily on the middle east for its crude. Crude oil prices jumped almost 4% to US$68.7, with analysts fearing an increase to US$80 in case of further escalation from Iran. The jump would depend on the nature, geographical expanse, and extent of the escalation. Back in India, after a strong period of low inflation, vegetable prices had led the inflation number to edge higher last month. A rising crude could further escalate this increase, as the trucks that bring the food from source to store start running on costlier fuel, making the items that reach you that much more costly. The rising inflation also puts the RBI in a tough situation, now having to deal with the dual problem of trying to get inflation down and spurring growth, and would most likely see the RBI keeping rates constant at current levels. The global conflict combined with the constraints on the RBI would in all likelihood dent India's short-medium term growth rates significantly, and prolong the slowdown.
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