Keep calm and carry on hoping

With speaker of Iran's Parliament Mohammad Bagher Ghalibaf and US vice-president J D Vance (still) scheduled to sit down with their teams to 'talk' in Islamabad tomorrow, it's best to keep hopes low. If agreement on a ceasefire holds - and it's an all-caps IF - the market for crude oil may take months to return to a semblance of pre-conflict normalcy. Rich importing nations will want to restore depleted strategic reserves, while developing economies will try to restore imports. Oil-producing nations must bring production back to Feb levels. This may take time. As supply from the Persian Gulf rises, Russia will face declining demand for its cheaper crude. Supply of refined petroleum will adjust to changes in global crude purchasing patterns, which adds to delayed normalisation. Disruptions from the Hormuz Strait's closure are feeding through supply chains. Reversing the process involves a time dimension.

Capital markets have positioned themselves for extended energy stress and will reset to keep pace with restoration of supply of oil and natural gas. Energy prices are unlikely to drop to their pre-conflict levels for most of this year. This will determine capital flows to emerging economies, like India, which has seen relentless selling by FPIs since hostilities broke out. Currencies should reflect altered trade balances till energy supply normalises to the glut prevailing till February.

RBI has held rates as monetary transmission of previous rate cuts is still playing out. But risks to inflation are climbing, specifically through downstream petrochemicals that work with a lag. Restoration of supply chains will influence conversion of supply shock to demand compression. Benign growth-inflation trade-off has become less so, and RBI will keep an eye out for knock-on effects before changing its dovish outlook. Anticipated growth deceleration is within permissible limits along with core inflation at the middle of the policy band. The low-interest rate window may have shortened a bit. Data doesn't support a frontloaded interest rate upcycle just yet.