The Reserve Bank of India’s Concerns on Global Supply Chains Amidst Red Sea Tensions

Reserve Bank of India

The Reserve Bank of India, in its latest report on 19 January, has expressed apprehension regarding the increasing pressure on global supply chains due to recent attacks on commercial ships in the Red Sea trade route. The resultant rerouting via the South African Cape of Good Hope has raised geopolitical risks, impacting both commodity prices and economic growth. The Reserve Bank of India cautions that transit times, war-risk premiums, and freight charges have surged due to hostilities in the Red Sea, leading to a considerable decline in daily trade volume through the Bab el-Mandeb Strait and the Suez Canal.

Impact on Indian Trade Sectors

The disruptions have most severely affected sectors such as petroleum, chemicals, non-metallic mineral products, mining, quarrying, and agriculture. The uncertainties arising from these developments pose challenges to India’s near-term merchandise trade outlook. Notably, recent increases in freight costs have affected transport cost ratios for India’s goods imports and exports, standing at 2.8% and 4.8%, respectively, in Q2 of FY2023-24, albeit declining from previous highs.

Reserve Bank of India’s Observations on Crude Prices and Global Trade Research Initiative (GTRI) Recommendations

According to the Reserve Bank of India report, despite production cuts, crude prices fell, driven by concerns over tensions in the Red Sea, a critical passage for 12% of seaborne oil trade and 8% of liquified natural gas trade. The GTRI report echoes these concerns, advising India to prepare for potential long-term shipping disruptions at the Bab-el-Mandeb Strait. Recommendations include exploring alternative trade routes, negotiating contracts with alternate suppliers, engaging with international shipping companies for freight negotiations, and covering part of increased insurance expenses.

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Escalating Tensions and Long-Term Implications

The escalation of tensions in the Red Sea, marked by drone attacks from Houthies on global shipping lines at the Bab-el-Mandeb Strait, is viewed as part of a complex Middle Eastern power rivalry, potentially continuing until the end of the Gaza war, as forecasted by GTRI. With Iran’s backing, these hostilities aim to raise the costs of engagement in conflicts, compelling the deployment of warships by the US and other nations to patrol and secure this vital chokepoint.

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Implications for Indian Trade and Security

The disruption in Red Sea shipping lanes significantly impacts Indian trade, particularly with the Middle East, Africa, and Europe. India, heavily reliant on the Bab-el-Mandeb Strait for crude oil and LNG imports and trade with key regions, faces substantial economic and security risks. As a response, the report emphasizes the imperative need for India to proactively address these challenges by diversifying trade routes, securing alternative suppliers, and negotiating strategic agreements with international partners.

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