Rising Middle East tensions, oil prices pose multiple risks for India

Middle East Tensions and India

• Iran crisis disrupting energy flows
• Price of India’s oil basket increases to $85 a barrel now
• CAD/GDP ratio can head up to 1.8-2.0% in medium term
• Any global risk aversion leads to lower FPI flows into EMEs

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Geo-political tensions have escalated substantially after the US-Israel launched military strikes on Iran. Iran has retaliated, targeting military bases and civilian areas in the Gulf region. The links of India with the Gulf region are close, starting with crude oil reliance, remittances, exports, etc.

While an armed conflict for a limited time may not have any major repercussions for the Indian macro, a lengthier period of crisis can negatively impact India and test its resilience. The challenge is that no one can predict how long the crisis will continue.

The critical issue for India is that the Iran crisis is disrupting energy flows. If the Strait of Hormuz remains shut or if there is an attack on energy infrastructure, then oil could surge toward $100 a barrel. For now, there is a one-month comfort provided to India to import oil from Russia – effectively allowing all loaded ships post March 5 to reach Indian shores.

India imports roughly 88% of its oil requirements, and most flows through Hormuz. Nearly 50% of its crude oil imports and 85% of LNG supplies transit via the Strait of Hormuz. The blockade of the Strait has increased freight charges and insurance costs of importing the oil. The price of India’s oil basket has increased to $85 a barrel now, from around $70 a barrel before the start of the escalation. On the current account side (CAD), our estimates indicate that a rise in crude oil prices by $10 a barrel widens the CAD by around $14-15 billion.

The other impact on the CAD is through the remittances received from the Indians working in the Gulf, mainly in the construction sector, hospitality, oil services, or the retail sector. Indian diaspora in the Gulf contributes nearly 38% to India’s total remittance of around $135-140 billion. On an immediate basis, there can be an increase in remittances as workers from the Gulf return home. However, if the conflict continues, the industries in which the Indian workers are employed are typically vulnerable to a war situation, and these workers may not be able to go back to their jobs.

Further, exports to the UAE in April-December 2025 were round 8.75% of India’s total exports and may face some problems. Overall, taking all the above into consideration from the CAD side, the CAD/GDP ratio can head up to 1.8-2.0% in the medium term.

Further, the crisis can also have an impact on the foreign flows. Any global risk aversion leads to lower FPI flows into EMEs. More so, as per data from the Department of Promotion of Industry and Internal Trade (DPIT), 5.1% of gross FDIs into India came from the UAE – this could be at risk.

Effectively, the goings for the USD/INR were not too smooth in the near past and the addition of the risk factor of Iran and given its macro implications for the external balances, we think that INR will continue to remain under depreciation pressure in the near to medium term. We now expect end-March 2026 at 92.25-92.50, and the extent of depreciation expected for FY27 is 2.5-3.0%, conditional on how far the war stretches.

There is also a likely impact on retail inflation. Weightage of petrol, diesel and LPG in the new series is higher at 6.8% compared to 3.6% in the previous series. However, with the government holding pump-head prices of petrol and diesel, there is no direct impact of the price increase of crude oil and global petroleum products on Headline CPI.

Having said that, input costs for manufacturers using oil derivatives as their inputs (along with the currency depreciation) will increase. This is expected to lead to some pass-through in terms of higher prices of manufactured products for the end users and can increase the Headline CPI by around 10-15 bps.

There could also be some fiscal impact if the war rages on for long. The government’s subsidy cost for both oil and fertilizers can rise. In our opinion, the government would be hesitant to pass on the burden of higher petrol and diesel prices to the end users. The government may also have to resort to cutting the excise duty on oil and absorbing the burden within the fiscal.