India is facing new economic risks due to increasing conflict in West Asia. The fear of interruption in oil supply has increased due to the assassination of Iran’s Supreme Leader and the subsequent retaliation. This may increase the prices of crude oil, which may impact domestic inflation and the Indian rupee. Policy makers are keeping a close eye on this situation. The reason for this is that the unstable geopolitical environment is bringing a lot of uncertainty for the country’s economy.
Experts believe that if crude oil prices cross $100, domestic inflation may increase. The effect of which can be seen not only in rupee but also in trade deficit. A fall of 21 paise has been seen in the rupee. According to experts, rupee can also cross the level of 92.
This development has further increased instability across West Asia and poses new economic risks for major oil importing countries like India. According to the ET report, officials said the Prime Minister’s Office is reviewing the situation with key ministries, amid concerns that a prolonged fight could shock the domestic economy through higher crude prices, pressure on public finances and weak remittance flows from the region.
Oil prices are increasing rapidly
The Israel-Iran war has taken oil to its highest level in several months. Crude oil prices have already reacted sharply. Oil climbed to levels not seen in months amid fears of supply disruptions in one of the world’s most vital production regions.
Iran accounts for about 5% of the world’s oil production. Before the start of oil trading in Asia, Bloomberg Economics analysts Ziad Daoud and Dina Esfandiari wrote in a report that prices could increase by about 20% due to a complete stoppage of supplies from Iran. He warned that about 20% of the world’s oil supply passes through the Strait of Hormuz, and the closure of the waterway could send prices as high as $108 a barrel.
Brent crude futures rose 7% to $82.37 on Monday, the highest since January 2025, in the first trading session on Saturday after the US and Israel attacked Iran and killed Ayatollah Ali Khamenei. By 0054 GMT, Brent was up $5.37, or 7.37%, at $78.24 a barrel.
Iran-Israel war increases threat to Strait of Hormuz
Tension is increasing in the Middle East. Anyway, shipping risks have also increased. Israel launched new attacks on Tehran on Sunday and Iran responded with more missile attacks. Commercial ships have also been damaged in this collision. Even today, Iran has further increased the situation by attacking Saudi’s largest oil refinery Aramco.
Israel-Iran war and India’s direct energy exposure
The Strait of Hormuz is especially important for India. About 20% of the world’s oil passes through this route and more than 40% of India’s crude imports come through this strait. Therefore, any prolonged disruption will have an immediate impact on domestic fuel costs and inflation.
If crude remains expensive for a long time, there may be pressure on oil marketing companies to increase the prices of petrol, diesel and LPG. Although the government may be able to absorb the shock in the short term through tax cuts or subsidies, higher prices in the long run will put pressure on public finances and perhaps alter the trajectory of its fiscal deficit. If fuel subsidy increases, infrastructure spending plans may also need to be relooked.
How far will oil prices go?
HDFC Bank said in a note that in case of prolonged tension due to prolonged closure of the Strait of Hormuz, oil is likely to rise to a higher range of $ 90-110 pbl. However, historically the strait has never been blocked for long. The bank warned that a soon increase in oil prices could put pressure on the currency and if the tension continues for a long time, the current account deficit could also increase. Currently the deficit for FY27 is estimated to be around 1% of GDP. It estimated that a sustained $10 increase in crude oil prices would increase India’s current account deficit by about 40-50 basis points, assuming other factors remain unchanged.
Will there be a challenge before RBI?
The timing of oil shock is very delicate. There was a lot of improvement in India’s inflation trend last year. Headline consumer price inflation eased to 2.1% in June 2025 and reached a historic low of 0.25% in October, remaining within the Reserve Bank of India’s target band of 2-6%. Under a revised data series in January, India’s core inflation rate stood at 2.75%.
This balance is now in danger of changing due to high oil prices. Increase in crude oil prices will increase transportation costs, food prices will increase and manufacturing expenses will increase, which will further increase inflation. This may make it difficult for RBI to cut interest rates at the end of this year, which was much expected.
What will be the effect on currency?
This fight is also likely to affect the currency. Rising oil prices, increasing geopolitical uncertainty and risk-off sentiment across the world could weaken the rupee.
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