Key Highlights

• India may face oil supply disruptions, economic shocks, and heightened geopolitical tensions from Iran-Israel conflict.
• Rising Middle East conflict risks impacting India’s energy security, trade, and regional diplomatic relations.

The Iran-Israel conflict is becoming increasingly intractable with each passing day, posing significant challenges to India's economy, which has shown remarkable resilience in the face of a barrage of geopolitical disruptions over the last three years.

The current flare-up occurs at a time when the Indian economy expanded by 7.4% in the fourth quarter of FY25, inflation was at 14-month low of 0.39 percent in May, and the Reserve Bank of India (RBI) eased monetary policy by lowering the repo rate by one percentage point to support economic growth.

Any threat to energy security arising from the ongoing Iran-Israel conflict has the potential to undermine India's hard-won macroeconomic stability, which has been achieved through significant government efforts, such as sustained capital expenditure. In fact, the Iran-Israel conflict may have a multifaceted impact on the Indian economy, affecting trade as well as other sectors.

The following three areas are critical.

Oil prices spiral

The price of the Brent crude has increased by over 12 percent to almost over 78 US dollar per barrel after the escalation. JPMorgan even estimates that in worst-case scenario Brent crude may come to 120 dollars per barrel.

The current account deficit (CAD) would worsen by about 0.3 percent of GDP and increase the annual oil bill of India by 12-13 billion dollars with a 10 increase in the price of crude oil. The entire situation would also result in the depreciation of the rupee against the US dollar (currently 86 rupees against each dollar).

This increase of oil prices will motivate inflation and the industries which use crude oil as a raw material, like paints, tires, cement, and chemicals will be under margin and profitability. A saving grace could be India's recent shift toward cheaper Russian oil imports.

Also Read: Gold Prices Surge Amid Israel-Iran Tensions: Is Now the Time to Buy or Wait?

The Strait of Hormuz

Another major concern is that Iran could block the Strait of Hormuz, a critical chokepoint through which the majority of India's crude oil imports pass. The strait has become a flashpoint in the conflict.

Iran has previously closed the Strait during times of tension. Any disruption could significantly reduce oil supplies, raising global crude prices.

The Global Trade Research Initiative (GTRI) has warned that the Strait of Hormuz is particularly vulnerable because Iran has complete control over the narrow waterway.

In case the confrontation intensifies and the United States becomes more actively involved in it, which, unfortunately, seems quite probable, as former President Donald Trump has already terminated his visit to the G7 and demanded to evacuate Tehran, Iran might adopt the measure to close the way completely.

The Strait of Hormuz is a highly strategic international shipping chokepoint in the world. It is the sole outlet to over one-fifth of world oil trade occupied between the Persian Gulf and the Gulf of Oman.

The Strait is very important to India, China, Japan, and some European nations that are major importers as around 20 million barrels of oil flows through it on a daily basis. Being vulnerable to military or geopolitical upheavals, it is especially so since its narrowest spot is 21 miles.

Interference of Trade Routes

India trade routes are also experiencing the wrath of the conflict between Iran and Israel especially the Red Sea trade route and the Suez Canal. Through these routes, about 400 billion dollars worth of trade is done in Europe, United States, Africa, and West Asia. Since the conflict between Israel and Hamas started in 2023, Iran-funded Houthi groups have been causing havoc in the Red Sea.

Consequently, Indian exporters have been re-routed to ships around the Cape of Good Hope which equates to an addition of 4.000-6.000 nautical miles and 2-3 weeks of travel time. This has caused the shipping cost to considerably rise between 15 and 20 percent, cutting down on the margins of the exporters. Some of the worst hit industries include textile, apparel and engineering products.