R. Suryamurthy
While India currently enjoys a period of moderating wholesale price inflation, hitting a 14-month low of 0.39% in May 2025, the calm belies underlying global fragilities, particularly the escalating Israel-Iran conflict. Economists are cautioning that renewed geopolitical tensions and their potential impact on crucial commodity markets could swiftly reverse India’s disinflationary trend, posing significant risks to the nation’s economic stability.
The recent escalation in the Israel-Iran conflict, which began in June 2025, has already sent ripples through international commodity markets. “The price of Brent crude has spiked to USD 75 pb currently, marking a sharp jump of more than 15% in Jun-25 (so far) – the highest since the start of the Russia-Ukraine war,” highlights a report by QuantEco Research. This surge is particularly concerning given the strategic importance of the Middle East in global oil supply.
Iran’s pivotal role, despite international sanctions limiting its production, stems from its control over the Strait of Hormuz, a critical chokepoint that accounted for approximately 27% of maritime oil trade volume in 2023. A severe escalation of the conflict could jeopardize this vital waterway, potentially pushing oil prices towards USD 100 per barrel levels.
“Durability of the shock would determine the macroeconomic impact for India,” notes QuantEco Research, underscoring the precarious balance. Higher crude oil prices directly translate to increased import bills for India, a major oil importer, and can fuel domestic inflation through increased transportation and input costs. The Reserve Bank of India (RBI) estimates that every 10% increase in crude oil prices could boost CPI inflation by 30 basis points and shave 15 basis points off GDP growth, besides widening the twin deficits.
Beyond Oil: Broader Commodity Market Vulnerabilities
The geopolitical landscape extends its influence beyond crude oil. “Industrial metal prices have softened amid mounting concerns over global economic growth, exacerbated by an escalation in tariff tensions,” observes Rajani Sinha, Chief Economist, CARE Ratings. She specifically points to “the imposition of new U.S. tariffs on steel and aluminium” that has intensified fears of a supply glut, particularly due to continued oversupply from China. While this currently exerts a disinflationary pressure on industrial metals, a prolonged global economic slowdown fueled by geopolitical uncertainty could have broader trade implications.
Conversely, precious metals are seeing an upward trend. “Bullion, which was already in a bull market, saw a price increase of ~5% in Jun-25 so far to USD 3450 poz,” according to QuantEco Research. This flight to safe-haven assets is a clear indicator of heightened global risk aversion.
India’s Limited Direct Exposure, High Indirect Risk
Despite the turbulent global backdrop, India’s direct trade exposure to Iran and Israel is relatively small. “For now, India’s limited trade with Israel-Iran renders the scope of direct impact as minimal,” states QuantEco Research. In FY25, Iran accounted for 0.3% of India’s merchandise exports and 0.1% of imports, while Israel represented 0.5% of exports and 0.2% of imports.
However, the indirect impact through commodity prices and financial markets remains a significant concern. “Sharp gyrations in international commodity prices, especially for ones which India is a key importer of, can have adverse macroeconomic implications,” warns QuantEco Research. Petroleum products and gems & jewellery collectively constituted a substantial 38% of India’s merchandise imports in FY25, and also hold significant weight in India’s Consumer Price Index (CPI).
Navigating the Uncertain Path Ahead
Economists are urging caution and close monitoring of the evolving global situation. “Looking ahead, while the current inflation trajectory is a welcome development, volatility in global markets and economies and unpredictable weather patterns due to El Niño remain the risks to be monitored,” stated Sankar Chakraborti, MD & CEO, Acuité Ratings & Research Limited.
Rajani Sinha further emphasized the need to “closely monitor both geopolitical developments and global trade dynamics, as these factors will have significant implications for inflation and input cost trends.”
For now, the consensus among analysts is that India’s macroeconomic stability hinges on crude oil prices remaining below a certain threshold. “As long as the price of Brent stays under USD 80 pb on average basis in FY26 (it averaged at USD 79 pb in FY25), there should be no adverse macro-financial spillover impact on India,” concludes QuantEco Research.
The current period of domestic disinflation provides a crucial window for policy maneuverability. However, the escalating tensions in the Middle East serve as a stark reminder that external shocks, particularly those impacting global energy markets, can quickly unravel domestic economic gains and necessitate a proactive and agile policy response to safeguard India’s growth and inflation trajectory.