US-Iran War Peace Deal On June 19: How Will India Benefit From This? Explained

[00:00:11]Good evening. A very warm welcome to this edition of the big question. I'm crimoc without doubt on that major geopolitical breakthrough. It's raising a big question for India. After nearly a 100 days of conflict, the United States and Iran, the two countries have announced this landmark peace framework.

[00:00:28]A formal signing is expected later this week and the deal is u including this ceasefire also the reopening of the straight of Hormos the lifting of the US naval blockade off the strait and a road map to ease sanctions with billions of dollars in Iranian assets that are set to be released by the US as well. So that's part of the framework. Now markets have cheered the possibility of this deal getting signed. Oil prices have dropped sharply. Brent has slipped below $84 a barrel and uh yes bond yields have eased as well. So there is this renewed optimism that one of the biggest external risks to the Indian economy may finally be behind us. For India this matters enormously. We import more than 85% of our crude and a large part of that flows through that straight of hormones. So the reopening of that route means smoother energy supplies also lower shipping costs and potential relief on inflation for our economy. The current account deficit as well the fiscal pressures as well. But now the real question is is that risk truly over or is the risk truly evolving? Maybe taking another shape altogether because even as the markets celebrate there are fresh fault lines that are forming.

[00:01:42]Israel has openly rejected this agreement. They're warning that this is not something that binds them. Israel is saying this about the deal and key issues like Iran's nuclear program remain largely unresolved. And yes, the 60-day negotiation window could determine whether this piece holds or unravels. And we know there can be many a slip between the cup and the lip. So now that we are in this phase, is India entering also a period of stability with lower oil prices, stronger growth prospects or are investors getting ahead of themselves with geopolitics still very much in play. So the big question that we're asking tonight is that now that we're talking about this peace deal, the prospects of it are clear, but is this going to be India's biggest risk that is going to be put behind us? It's a good question to ask and we'll pose it to our panelists. We've got a distinguished list of panelists joining us on the show. Former diplomat Prahu Dal is with us along with veteran market expert Ajay Baga and we have chief economist at Yes Bank Indrail Pal also with us along with senior fellow for energy investments and connectivity at the think tank gateway house. Amit Bundari is with us. Gentlemen welcome to the big question and let me take a quick round of questions to get your primary views in. Rahu Deal, has this US Iran deal actually removed India's biggest geopolitical risk at the moment or are we mistaking a ceasefire for some kind of durable peace? How do you read it?

[00:03:11]>> Well, Vikram, you asked a very pertinent question yourself during your introductory remark. You asked whether the difficult phase is over or is it evolving? Well, you know, this problem may not get resolved as easily as we would like to for the simple reason that there are certain factors involved which are impediments.

[00:03:43]Now Iran and the US have agreed that the peace deal will also cover Lebanon because the Hezbollah is of great interest to Iran. The Hzbollah is not just Iran's proxy but there are sort of fraternal ties between them.

[00:04:06]Now, Israel has very categorically come forward and said that the peace deal will not apply to Lebanon and for that matter it has said it is not going to follow anything to do with the peace deal. Now if Israel which says that it will continue to occupy its security zones in not just Lebanon but also in the Gaza in Syria and in Iraq. If Israel does that then the unraveling of this particular peace treaty is very likely to happen. Trump is now trying his best to get the deal through because there are a variety of reasons. Firstly, he's under domestic pressure. Secondly, he's also under international pressure because he's being held responsible for the huge escalation not just in energy costs but also in global inflation which is taking place and which is very evident to the Trump administration members. So he wants a peace deal. The Iranians POSSIBLY ALSO WON'T because they have suffered enormously and their economy is in very bad shape. Their military has also suffered a great battery. But and this is a fundamental but will Iran agree to a peace deal on any terms? I'm afraid not. Now the Israel factor become very important. Now let me also point out that what is being agreed upon on June 19th is going to be in the nature of a memorandum of understanding. That is to say the two sides will agree to sit down and resolve the outstanding issues. Now these outstanding issues are not going to be easy to resolve in particular the nuclear issue because there have been great efforts made by the United States to get Iran to agree to the sort of nuclear deal which the US has in mind but Iran is simply not agreeing. So this twomon period which has been set aside for working together may prove to be not as productive as everybody would want it to be. So there are these are obstacles.

[00:06:29]So these are also my preliminary.

[00:06:31]>> You're saying they're obstacles need to come through.

[00:06:33]>> So yes indeed we are very optimistic and the markets seem to be as well. The markets are celebrating. So the question is are we getting ahead of ourselves? A ba oil prices down rupee stronger. So you think this reaction is justified or you think investors are getting ahead of reality?

[00:06:51]>> No. So for India we have a limited objective. We want crude oil supplies.

[00:06:56]We want the pricing to go down. We need the supply chains out of the Gulf to be working. And our huge diaspora are working in the Gulf sending home $59 billion a year. They should not be disrupted. And fifth uh upside is our companies do a lot of work in the Gulf.

[00:07:14]The Chinese will get most of the reconstruction. We will get some part of it. So we look forward to that. That those are the uh Indian objectives uh in this. I think it's got more or less uh addressed today. Uh are we ahead of ourselves? Definitely in in a situation like this taking a view February 26th when the negotiators finally said okay we'll go back to US and get back to you this was practically what was going on and at that time the straight of hormus was not shut so we have lost more than 110 days of production in the Gulf we have had straightfor getting weaponized and weaponized forever now uh and also uh the huge divergences between Iran and the US, Iran and Israel remain. Uh the whole idea of sanctions on Iran was to starve uh its proxies of funding. Now if you're going to open uh the Iranian economy and allow Iranian oil to be freely sold, those proxies will get funded again. So I think it's a huge loss for the Israelis. The US can't be bothered. It's America first. It's isolationism for them. And it's like a deal like what Trump told the New York Times reporter that in case they don't do a deal, I'm willing to take 20% of the Middle East revenues and we will maintain the peace. So for Trump, it's very transactional, not relational. Uh I think the biggest losers are the Iranian people because Trump told them help is coming, you stand up in revolt and then he let them down. Now there is even lesser hope. In fact, the regime will get more butt rest. Uh they are stronger now. They have a working model of how to disrupt the global economy and get everybody on their knees. I think that has come through. Uh at least for the next couple of years, the world is very vulnerable to state of hormones. Then pipelines will come up next year. UAE huge pipeline is coming up which will bypass uh the hormones totally. uh there's a big pipeline Iraq has ordered which will go to the Turkish Mediterranean port. So >> yes >> will start taking those measures but at least two years we are very dependent on >> so the vulnerabilities stand as of now like you're pointing out as well and the markets may be overreacting but uh yes that's the kind of um kind the news flow that would optimize the market at least for the time being but Mr. Bandari since the straight of Hormos carries nearly 20% of global oil flows with that reopening or at least the possibility of that how big a reset would that be for India's energy security and for our logistics costs which have been skyrocketing >> so I think more than logistics cost it will be the price of oil that is of concern to us uh because think about it oil was $100 plus a barrel a few weeks back right now it is at $83 $84 a barrel which is a much more comfortable number for us. Uh logistics cost on the other hand whether you get it from uh you know west Africa, North America or or even the West Asia will not be more than $2 or $3 a barrel. I mean the difference won't be in beyond that. So I think the biggest plus for us one is the reduction in the price of oil and I think the second part is that there is obviously a perception that uh the conflict will not restart at least for another seven or 8 months if at all and I think the markets are pricing in that because you have to also look ahead uh there is a midterm poll in the US in November. I don't think the president will want to restart a conflict which will push up gas prices. uh then Europe has to stock up fuel for winter. Uh you know uh an energy crimp during the winter months is going to cause extreme distress. I don't think they'll go in for that either. So probably till February or March of next year we have a temporary peace and I think we should try and use this window the best way we can.

[00:11:18]>> So temporary peace again Mr. Pan then when we talk about India importing more than 85% of our crude and Brent now is slipping below $84. How much of this is real relief? Does it deliver anything on inflation, the current account and our growth prospects?

[00:11:35]>> Well, I think uh the common thread here as you rightly pointed out is the temporariness of the uh of the deal. Uh and uh whether we have time enough to actually uh sort of set our house in more in in order is a very very difficult uh sort of story to tell. Now I think the uh the issue here is in terms of the uh the reser reserver capacities the the uh the buffer stocks in terms of both the LPG and the crude oil that we uh need to m maintain and I think on a strategic front uh from a medium to a long-term perspective that uh definitely needs to uh sort of go up.

[00:12:18]So that that's uh point number one. In terms of the financial markets, I think u I would sort of uh uh clearly agree to Mr. AJ Baka. Uh and I think uh there could be temporary reliefs for all asset classes. Uh we are rejoicing no doubt and as you rightly pointed out there is a a big sort of momentum that has happened in in terms of oil. Uh which has led to a currency uh appreciation bias for India. uh yes the RBI has done its bit in terms of uh sort of pulling capital flows but till the point in time the uh west Asia crisis and the overall risk perception in the globe is relatively on the higher side. uh my personal expectation was that the uh 60 to 70 to 80 whatever number was getting quoted in the market in terms of the FCNR flows uh may not have materializ materialized uh also because the interest gap between India and US is relatively low at this point in time. Uh now along with that if oil prices actually correct and is around the 80 to 85 u billion dollar mark uh that immediately pulls down my current account deficit by about 0.2 to 0.3% and therefore definitely provides that additional comfort along with uh the efforts of the Reserve Bank of India to pull in uh the resources. So talking about positives, if we were to believe that this actually happened and we'll take a small break and we'll discuss it right after whether the strategy as far as West Asia is concerned can be recalibrated. It's an important piece because it goes beyond discounted oil.

[00:14:00]It goes to the Chabahar port etc. So when it comes to India and regaining ground for India in Iran if this deal has to hold, how would it actually play out? We'll bring that up right after this break. Do stay with us. Our panelists are going to stay with us on the big question.

[00:14:27]On the big question we're asking about the Iran peace deal, is this going to fundamentally change how India looks at its West Asia strategy? Let's take it across to our panel. Let me come to you.

[00:14:38]Uh um Mr. Let me go across to Mr. Bandari. If this goes beyond cheaper oil, this peace deal, does this talk of it even reopen a serious opportunity for India in Iran which may include Chabahar, which may include regional connectivity for us, those corridors opening.

[00:15:00]Uh so uh if Chabahar uh sort of restarts in a big way for India, I think its utility will be I mean it will be fairly limited because uh at the end of the day it is a way for Afghanistan to uh get an outlet into the sea. One uh Afghanistan is not a huge economy with a massive demand for goods. So this will of course be a limited number. I mean if you look at the population of Afghanistan, it's about the same as the city of Bombay. I mean so there is going to be a limited demand and uh you know the third part about this gateway to central Asia etc. Let us remember that central Asia is one of the most uh thinly populated regions of the world and uh the sanctions on Iran are going to be reduced but they are not going to entirely go away. So this whole possibility of building pipelines from Turkmanistan and all uh down to the Arabian Sea I think it's going to be very long-term if not unlikely. So I would kind of hold my horses. I think the primary advantage is going to be the lower price of oil and the opportunity to uh sort of do something about our vulnerabilities in the longer run.

[00:16:04]>> So then there are these vulnerabilities right now. I'm just wondering how we can recalibrate on the diplomatic front. Mr. Deal, does it ease India's balancing act or does it really complicate even further between the US, Iran, Israel, the Gulf India positions itself diplomatically?

[00:16:22]Well, India has had a very tough task in balancing its interests with the US on one hand and with Iran on the other.

[00:16:32]Till now we have managed but you know as Mr. Bhari said let's hold our horses because things are not going to ease up entirely so quickly. There are certain compulsions because of which Donald Trump is pushing the peace deal. But you know the Iranians are showing their standard attitude of once bitten twice shy. In fact they have been bitten more than once. They were attacked in June last year and again on the 28th of February this year just when they were working towards a nuclear deal. So Iran is very pessimistic about US interest.

[00:17:11]Now let us talk about how things are changing. On the one hand, the US is saying that the spread holds is going to open immediately after a deal is signed between the US and Iran on 19th June.

[00:17:28]But Iran is saying that look, we'll take some time. The state of Hormos will reopen under Iranian arrangements. Now what are those arrangements? These are things which need to correct.

[00:17:42]Iran would certainly demand its pound of flesh and that pound is going to be a very big pound.

[00:17:50]>> Correct.

[00:17:51]>> Now, is the United States prepared to pay? Look at the the terms which are being worked out. The United States is agreeing to give in on a number of issues. the frozen assets of Iran for instance and also in a way allowing Iran's oil to flow and helping Iran to repent.

[00:18:17]How this affects our interest of course as I said we have balanced our interests with both sides and I think we will see >> so for the time being then we are seeing Mr. Baga the rupee the bonds the equities we are seeing them in a tactical rally or do you think this is going to be more durable as a trend and what about the fii flows does easing geopolitical risk actually change India's attractiveness compared to other emerging markets >> yeah to some extent yes what Mr. Indra Neil also mentioned I would say one it makes the rupee more resilient. It helps our current account deficit. He gave a number also for that. Yes. Uh you know cheaper oil is always welcome and what is our biggest issue right now is the oil price is the input cost. Today if you see the WPI that came out for uh May that has come at 9.68 and your CPI is 3.93. What is that showing? your input costs have gone up or your factory costs have gone up, producer costs have gone up but they're not able to pass it on to the consumer in a very reductionist very simplifying logic. Uh that is what it's showing 5% uh that's a massive number which is not not got passed on which has to be passed on or it has to be reduced.

[00:19:36]So this gives us an opportunity to reduce it. But energy security is national security. I think India is very clearly now aligned on the UAE. Israel axis. The Saudis have chosen more of Pakistan. We are not enemies with anybody. But I think UAE and Israel is where India's future lies. We have to keep Saudi happy. We have to keep the Iranians engaged. But in the end most of them vote as OIC. Most of them vote with Pakistan. We don't have any enemies other than Pakistan. But in terms of friends, I think UAE is a closer friend today and Israel always a friend. I think those two are coming through clearly. And then how to resolve the Russia Chinese closeness. I think these are the big geopolitical issues for us.

[00:20:28]But in an economic sense for the markets, I think it's a positive move.

[00:20:34]Trump's hand is very weak. What Mr. Deal mentioned, how do you go into a negotiation when the other side knows that you have no appetite for further conflict and you will not attack before November elections are through. So Iranians will use, remember the Obama deal, Vikram, it took two years. True.

[00:20:53]>> Iranians will just keep on postponing this. you will not get any deal but if a conflict doesn't happen that meets our strategic objectives we just need the oil we need contracts and we need the 9 cr Indians who are working there to be able to work and send home 59 >> totally >> that's our you know limited objective >> so that limited objective you see us being able to achieve a big breakthrough moment yes but it does come with big caveats yes The US US Iran deal took the edge off one of the biggest global risks. Oil has cooled. Markets have steadied. For India, the immediate pressure is on inflation. Also the rupee, the import bill. Clearly, all of that has eased. But this is not peace right now. It is a pause. The deal is conditional. It is fragile. It is contested. Israel openly dissenting. The nuclear issue is unresolved. 60-day clock ticking on. Whether this holds on ravels is a big question mark. So the risk has not disappeared. It has simply shifted form. Supply disruption at one level to geopolitical uncertainty for India. Of course, the opportunity is real, but so is the need for caution and agility and smart strategic choices.

[00:22:05]It's a very complex neighborhood. My thanks to our guests Prahua, AJ Bhaga, Adranil Pal, and Amit Bandari. Thank you for joining us in what was a very limited amount of time to take this on, but of course, we'll keep at it. And indeed, this is not just about oil. Yes, oil prices easing is definitely a plus for the Indian economy, but the bigger moving piece are the geopolitical risks and that is not off the table for India.

[00:22:28]I'm Vicramos on the big question. Thank you for joining us.