The escalating Iran-Israel conflict is casting a long shadow over India’s economic horizon, with crude oil prices surging and threatening to unravel the delicate balance of inflation and growth. As Brent crude nears $78 per barrel following Israel’s recent airstrikes on Iranian military targets, India—importing over 85% of its oil needs—faces a perilous moment.
The stakes couldn’t be higher for the world’s third-largest oil consumer, where every dollar hike in crude prices ripples through the economy, fanning inflation, weakening the rupee, and straining fiscal resources.
India’s energy security is on edge. While direct imports from Iran are negligible due to U.S. sanctions, the Middle East, including key suppliers like Iraq, Saudi Arabia, and the UAE, accounts for nearly half of India’s crude oil imports. The Strait of Hormuz, a chokepoint through which two-thirds of India’s oil flows, is now a geopolitical flashpoint.
Any disruption—say, Iran blocking the Strait in retaliation—could send oil prices soaring past $100 per barrel, as J.P. Morgan warns, with catastrophic effects. A $10 per barrel increase alone could spike India’s Consumer Price Index (CPI) by 0.5 percentage points, reversing the hard-won disinflation that saw retail inflation drop to 2.82% in May.
The inflationary fallout would be immediate and brutal. Higher oil prices drive up transportation and production costs, pushing prices for everything from diesel to fertilizers. Rural households, already pinched, would face steeper LPG and food costs, eroding disposable incomes and dampening demand.
The Reserve Bank of India (RBI), which recently lowered its FY26 inflation forecast to 3.7%, could be forced to shelve anticipated rate cuts—perhaps as early as December—to tame resurgent inflation. This would mean higher borrowing costs, tighter EMIs, and a slowdown in investment, choking off growth in an economy projected to expand at 6.3% this fiscal year.
The rupee is another casualty. As oil prices climb, India’s refiners need more dollars, driving up demand and weakening the currency—already down 54 paise to 86.14 against the dollar after the latest escalation. A weaker rupee inflates import costs, widening the current account deficit by an estimated 0.3% of GDP for every $10 per barrel price hike. This vicious cycle could balloon India’s oil import bill to $101-104 billion this fiscal year, up from $96.1 billion last year, squeezing government revenues already stretched by fuel subsidies.
Beyond oil, the conflict disrupts trade routes. Houthi attacks in the Red Sea, backed by Iran, have already forced ships to detour around the Cape of Good Hope, adding 15-20 days and 40-50% to export costs. Indian goods, from petroleum products to textiles, lose competitiveness in global markets, while higher freight costs feed into domestic prices. Sectors like aviation, chemicals, paints, and tyres, reliant on petroleum inputs, face shrinking margins, with ripple effects on jobs and investment.
Yet, there’s a sliver of hope. India’s diversified oil imports—36% from Russia in August—and record foreign exchange reserves offer some cushion. OPEC+ spare capacity, led by Saudi Arabia and the UAE, could offset Iranian supply disruptions.
But these are fragile buffers. A full-blown war, especially one targeting Iran’s 3.3 million barrels per day output or the Strait of Hormuz, would overwhelm these safeguards. Even if prices settle, as some analysts predict, prolonged volatility could keep India on edge.
The government faces a grim choice: absorb higher fuel costs through excise duty cuts, sacrificing revenue, or pass them on to consumers, risking public backlash. Either way, the fiscal deficit strains, potentially diverting funds from infrastructure or welfare. The RBI’s cautious stance reflects this tightrope walk—low inflation and robust growth are at risk if the conflict spirals.
India’s diplomatic balancing act with both Iran and Israel, coupled with its push for alternative routes like the India-Middle East-Europe Economic Corridor, underscores the strategic bind. For now, New Delhi can only watch and brace. The Iran-Israel conflict isn’t just a distant war—it’s a direct threat to India’s economic engine. With oil prices teetering and inflation lurking, the nation’s resilience will be tested. Buckle up; this ride could get bumpy.