Strait Of Hormuz: Why Disruption Of Key Trade Route Can Worry India

Fresh tensions between Iran and Israel have sparked fears of disruption of key trade routes critical for global sea trade. Earlier in the year, ships passing through Red Sea region were attacked by Houthi rebels from Yemen. Iranian authorities seized an Israeli-owned tanker passing through the Strait of Hormuz.

The tanker MSC Aries was redirected towards Iran while it was passing through the strait between Persian Gulf and the Gulf of Oman. It connects the Gulf with the Indian Ocean. Among the 25 crew members onboard the ship, 17 are Indians. Reports indicated that the Indian government is in touch with the Iranian authorities to press for the release of Indian crew members.

With possibility of escalation of hostilities between Israel and Iran and disruption to the key Strait of Hormuz, India's external sector could be bracing for some headwinds.

The Impact Of Strait Of Hormuz Disruption

The world suffered the brunt of disruption to the Red Sea passage last year. As per United Nations Conference on Trade and Development (UNCTAD) data, transit volume dipped by 42 per cent compared to its peak due to the Red Sea crisis.

During this crisis, the shipping costs for Indian players increased in the range of 40 to 60 per cent. This has impact on the commodity prices in the country. A similar disruption in the Strait of Hormuz could pose more trouble for the country.

Bulk of India's crude and liquefied natural gas imports come from the Persian gulf. As per the data, nearly 60 per cent of imports from the Gulf nations. India meets nearly 85 per cent of its oil needs via imports as the domestic capacity is limited.

Not only for India, the passage is important for global trade as 20-25 per cent of oil and natural gas tankers pass through the region.

For these imports, Strait of Hormuz is critical as some estimates suggest that 84 per cent of the country's oil imports pass through the region. The biggest impact of the disruption will be visible on the oil prices which have already risen from $75 per barrel to $90 per barrel this year.

At a time when central banks of the country are hoping to cut interest rates, pressure on oil and commodity prices can force a rethink on their part.