The pre-dawn attack on the installations of Saudi Arabia's state-run petroleum and natural gas company Aramco might have a huge impact on India at a time when economic indicators aren't in best of the shape.
The resultant outage from the attack may lead to a depreciation in the rupee value, along with increased foreign fund outflow.
The Gulf country, which contributes 10% to the global oil output, has, on an average, produced around 9.9 million barrels of oil every day in 2019. As a result of the attack, seen as the worst attack on the country's oil infrastructure since Iraq’s Saddam Hussein fired Scud missiles into the kingdom during the first Gulf War, the country has decided to shut down almost 60% (5.7 million barrels) of its oil production.
The country contributed 19.5% of the total 207.3 million tonnes of crude oil that India imported in 2018-19. The number is expected to have increased after the US sanctions on Iran tightened.
The cut in the supply of oil will result in the stronger dollar globally, as the price of crude oil, traded across the world in US dollars will shoot up. On Friday's close benchmark Brent Crude traded at $60.52 a barrel, and has been on an upward trajectory in the recent past.
"There would be a spike in oil prices in the near term. But we need to see by when Saudi will be able to restore the supply. It may not be for too long, after all. Our import will obviously go up because of this. The currency has also been under pressure in the recent past," Kavita Chacko, Senior Economist, CARE Ratings said.
The rupee had closed 70.92 against the greenback, gaining for a sixth consecutive day, on Friday. The spike in oil prices, however, is expected to send this gaining momentum for a toss.
The experts also suggest that it may lead to an outflow of foreign funds from the country's markets, as foreign investors always prefer a stronger local currency to maximize their returns.
Since Finance Minister Nirmala Sitharaman's first budget, FIIs have turned heavily negative on India and remained in a massive sell-off mode till the end of August. Foreign investors, however, turned net buyers in the first half of September, pumping in Rs 1,841 crore into the capital markets, after remaining sellers for the previous two months.