India's CPI to CAD in safe zone till Iran-Israel conflict remains contained, say experts

Israeli PM Benjamin Netanyahu with PM Narendra Modi

The escalating conflict between Iran and Israel may not be a major worry for India's macroeconomic health - with domestic inflation at a six-year low - as long as the crisis remains contained as only a short war, economists told Moneycontrol.

"Only if the conflict widens, therefore, keeping oil prices elevated for a longer period of time, then we can worry about any impact on India’s domestic inflation. If it is for a short term say for a month then the impact should not be significant," Devendra Pant, Chief Economist, India Ratings said.

India’s retail inflation eased to a 75-month low of 2.82 percent in May as food prices eased below one percent for the first time in nearly four years. Notably, fuel and light inflation too continued its downward trend last month at 2.78 percent compared to 2.92 percent in April, 2025.

As India is a net importer of crude oil, hence, any rise in prices - if transmitted to retail fuel costs - leads to higher inflation which eventually spreads into goods and services across the board. According to estimates from Emkay Global, every $10 per barrel increase in oil leads to annualised gains of 35 bps in retail inflation.

Crude oil prices soared up to 13 percent on June 13 following Israel’s strikes on Iran's nuclear and ballistic missile installations, jolting the global markets with fears of a region-wide conflict. After Israel launched what it called 'preemptive strikes' against Iran, Tehran launched more than 100 drones in retaliation, sparking worries over the conflict expanding.

“If we are able to find regular uninterrupted oil supplies, and if oil prices do not escalate by a lot, then impact will be limited. If oil prices, like say, cross $100 or $120 per barrel owing to a potentially wider conflict, then definitely the impact will be there," Sri Hari Nayudu, Economist at NIPFP, told Moneycontrol.

India Rating's Devendra Pant agrees if oil prices reach $80-85 per barrel and stay there for a longer period of time, only then India may need to start worrying.

India doesn’t import any oil from Iranian, but a wider Middle-East conflict could disrupt supplies from the UAE, Saudi Arabia, among others, thereby increasing crude prices.

NR Bhanumurthy, Director, Madras School of Economics does not foresee a supply issue for India as the country can keep picking up the bulk of its crude requirements from Russia as well as start importing from the United States, a proposal already under consideration. Bhanumurthy said any impact on India's local inflation depends on how fast the current conflict escalates.

"There is risk of this escalating though earlier also once Israel attacked Iran with the latter retaliating and both claiming success and denying major damage and the tensions faded. However, in this case more details are awaited and in the near-term oil would be highly volatile," Madhavi Arora, Chief Economist, Emkay Global said.

However, Arora said, the agency continues to see CPI inflation undershooting RBI’s estimate of 3.7 percent to average much lower at 3.3-3.4 percent in FY26. Devendra Pant too said that since India's retail inflation 'is very much in control', the country should be able to absorb a fallout from a shorter war between Tehran and Tel Aviv.

Trade and CAD

Already reeling from the impact of tariffs, the conflict between Iran and Israel does raise concerns over India's trade and external finances, especially if there are any disruptions in the Strait of Hormuz, a shipping lane through which a major chunk of the world’s oil passes.

Iran had earlier threatened to disrupt the route if it was targetted by Western powers.

“This year, our concern would be more on the current account deficit. Oil, remittances, tariffs, which will hamper our exports while our imports become expensive. It started with Trump, but got aggravated due to the wars happening. It will have repercussions on global trade. The emerging market economies who depend heavily on trade, I think they are the ones who get affected," Bhanumurthy said.

A slowdown in exports typically raises concerns for India’s current account deficit (CAD), the broadest measure of trade in goods and services.

Madhavi Arora maintained that India's CAD as a percentage of GDP is seen at 0.8 percent in FY26 - if Brent remains at $70 per barrel - while warning that every $10 per barrel risks a rise of 0.4-0.5 percent. Devendra Pant added that while India does import a lot of crude oil, the country also exports significant amounts of refined petroleum products. "So, while we may lose more due to a higher oil import bill, if prices rise, we may also gain to an extent on the export side. Therefore, the trade deficit could widen less than expected."

India's trade numbers are highly sensitive to its oil import bill. Infact, in April, the country's merchandise trade deficit was at its widest in five months as imports of petroleum products spiked, limiting the impact of a jump in exports to the United States. Oil imports rose to $20.72 billion in April from $19 billion in March.

While India's exposure to the world economy is limited with a share of about 2 percent in global trade, New Delhi needs to be cautious, according to NIPFP's Nayudu. "Not only trade and tariffs, but a war in the gulf impacts Indian remittances as well. Any international event will have an impact. The extent of the impact depends on how direct or indirect are the repercussions," Nayudu said.