Three weeks ago, traders were celebrating quietly the end of an oil scare. Brent had reached the low 70s, the rupee had strengthened above 94 and fund managers in Mumbai were marking a dull year ahead in the second half. The calm didn't last long, however. On Wednesday this week, Brent crude was at its highest price since last month, closing at $85.13 a barrel, as the United States reimposed a naval blockade on Iranian shipping and initiated a seven-hour strike campaign on military assets along Iran's coastlines including facilities near the Strait of Hormuz. Iranian state death toll as a result of the strike in the barracks was reported as seven dead and more than 260 injured. The rupee had been hovering around 94 per dollar on the day it weakened to 96.32. It's not a new thing to anyone who has been following the oil markets since the events of the Iran conflict first began in February and brought Brent from the low sixties to above $120 at the end of April. But it's a tale which appears again and again slightly remixed each time and each time it returns it poses the same question for Indian households, businesses and policy makers: How much of this is minor acousmatic noise and how much is the new cost of conducting business in an era where the Gulf's most important shipping route is no longer a sure bet for safe passage.

They are now very predictable in their mechanics. India imports over 85 per cent crude oil and almost all of it in dollars. A rupee depreciation at the same time that Brent depreciates makes the dollar bill even more expensive in rupee terms, and increases the dollar price of the depreciation. Every $10 increase in oil costs leads to an additional $14-$16 billion to India's import bill in a year's time, which adds up quickly, given that the country consumes over 4 million barrels a day, Axis Bank's chief economist has noted. Add a depreciating currency on top of that and the numbers mushroom. In fact, Brent spiked by 45 percent and the rupee by nearly 4 percent between the end of February and the end of March this year, a movement of values “too strong” for HSBC to stomach, and causing India's balance of payments gap to almost double this fiscal year from $35 billion to an estimated $65 billion.

All of these are not happening in isolation of equity markets. Foreign portfolio investors began buying shares in India for the first time in four months in July, according to NSDL data, as they purchased ₹18,314 crore worth of Indian stocks, the second month this year they have been net buyers. The fragile recovery is now on shaky ground. Meanwhile, the source of concern for fund managers monitoring India's external accounts remains stark if crude prices don't fall back down to under $60 and touch, the old fears of the current account and the rupee come into focus and foreign inflows that have come in only in dribs and drabs desist. The magnitude of the previous exodus is clear: The net sale of Indian equities in FY24, which is projected to hit approximately ₹2.56 lakh crore, is the highest ever in a calendar year, and no one in Mumbai wants that trend to repeat as it just started turning around.

There's a more positive flip side of the story, and it deserves as much attention as it's given. Over the last month, Goldman Sachs has been more positive about India's external position, commenting that the nation's economy had a $7.2 billion BOP surplus in the first quarter of the calendar year and that India's economy was becoming structurally less vulnerable to oil shocks due to greater energy efficiency, increased electrification and a changing growth mix less reliant on oil-energy hungry industry than a decade ago. The RBI has also established a forward dollar book of nearly $110 billion, providing the bank with considerable firepower to counter swings in the currency rather than just watching the rupee plunge. There's also a buffer from inflation data wholesale prices are more sensitive to crude moves than retail prices, which then takes two to three months before the central bank reacts to the price spike with policy.

Reading the present moment unabridgedly tells us that $95 oil is not a must come, but it is pretty close to the realistic ceiling, and investors would be fooling themselves if they disregard it. Brent was in this choppy zone of price discovery on six of its last nine trading sessions earlier this year as Standard Chartered's own analysts noted that the price "reflects the uneasy balance between the hopes of a ceasefire and a physical market that continues to close in on it". The one difference is that the market has now lived through this cycle twice in five months thus the usefulness of that as information and not panicked at every headline. Those retail investors who have been seeking every geopolitical twist of crude have for the most part suffered the consequences, while the ones who held on to their earnings, currency hedges and diversified exposure have been much stronger. For all of those with money in Indian markets at the moment, the sensible shot is neither denial nor fear, but simply watching Brent's reaction to the price level it ends up at and watching the rupee's reaction to that, before deciding on the next move, rather than based on the next Hormuz headline or the Reserve Bank's inflation commentary.