R. Suryamurthy
The global geopolitical chessboard, already fractured by the ongoing Russia-Ukraine war, now faces a fresh and arguably more volatile challenge: the escalating standoff between Israel and Iran. This isn’t just another regional squabble; it’s a simmering cauldron with the potential to scald the global economy, and particularly, the sensitive balance of India’s macroeconomic stability.
The core of the apprehension lies in the Strait of Hormuz. As a recent QuantEco Research report starkly reminds us, this narrow passage, controlled by Iran, is “a key chokepoint for world oil trade that witnessed ~27% of maritime oil trade volume in 2023.” While global supply chains have shown remarkable adaptability in the wake of previous disruptions, including the Russia-Ukraine war and the Israel-Hamas conflict, an escalation in the Israel-Iran imbroglio directly imperils the arteries of global energy trade.
The markets have already sounded the alarm. Brent crude, the international benchmark, has surged to approximately USD 75 per barrel, a “sharp jump of more than 15% in Jun-25 (so far) — the highest since the start of the Russia-Ukraine war,” notes a Bank of Baroda analysis. This isn’t merely a statistic; it’s a direct threat to India’s economic health.
Why does this matter so profoundly to India? Our economic engine runs heavily on imported oil. Petroleum products, alongside gems & jewelry, constituted a staggering 26% and 12% respectively of India’s merchandise imports in FY25. These aren’t just industrial inputs; they are directly woven into the fabric of daily life, influencing everything from transport costs to manufacturing expenses. Unsurprisingly, they carry significant weight in India’s Consumer Price Index (CPI) – 4.2% for petroleum products and 1.2% for gems & jewelry.
The Reserve Bank of India (RBI) has previously laid bare this vulnerability. Its assessments indicate that “every 10% increase in the price of crude oil (assuming complete pass-through) could increase CPI inflation by 30 bps while lowering GDP growth by 15 bps, besides having adverse spillover impact on its twin deficits.” This isn’t abstract economic theory; it translates into higher petrol prices at the pump, increased manufacturing costs, and potentially, slower job creation.
While ICRA projects the Indian Basket of crude to average between $70-80 per barrel for FY2026, the current volatility pushes us perilously close to the upper bound. A sustained period above this threshold would directly widen India’s current account deficit. As ICRA points out, “any sustained increase beyond these levels could lead to an enlargement of the CAD by 0.3% of GDP for every $10/bbl increase in crude oil prices.” This is a critical concern for a nation striving for macroeconomic stability amidst global headwinds.
Furthermore, the ripple effects extend beyond crude. India’s reliance on LNG imports, especially from Qatar and UAE, means that disruptions in the Strait of Hormuz would pose significant risks to our natural gas supply chain. With nearly 54% of our LNG imports transiting this narrow waterway, any uncertainty could drive up spot LNG prices, impacting critical sectors like power generation, fertilizer production, and city gas distribution.
It’s true, as some analyses suggest, that “India’s limited trade with Israel-Iran renders the scope of direct impact as minimal.” Our trade volumes with these nations are indeed small. However, this narrow perspective misses the larger, more potent threat: the indirect consequences through global commodity prices and financial market sentiment. When crude surges, and safe havens like gold gain, it signals deep-seated risk aversion that affects investment flows and economic confidence across the board.
For now, the cautious optimism hinges on Brent crude averaging “under USD 80 pb on average basis in FY26.” But this fragile equilibrium can be shattered with alarming speed. India cannot afford to be complacent. Policymakers must brace for potential inflationary pressures, revisit fiscal strategies to absorb potential energy subsidy burdens, and continually assess the evolving geopolitical landscape.
The Middle East’s geopolitical tremors are not just distant headlines for India; they are direct challenges to our economic resilience and the livelihoods of our citizens. As tensions simmer, India’s economic future will, to a significant extent, be priced in barrels of oil, whose flow depends precariously on the precarious peace of the Strait of Hormuz.
(R. Suryamurthy is a senior economic journalist based in Delhi)