Iran war could widen India’s CAD if crude prices stay elevated, warn analysts

Experts warn that a sustained increase in oil prices could quickly worsen India’s balance of payments, which includes trade in goods and services, investment flows, remittances, and financial transfers.

• Rising oil prices may widen India's current account deficit
• India's CAD could rise by $9 billion for every $10 oil price jump
• Services exports offset commodity import pressures

Did our AI summary help?

The US and Israel war on Iran, which has ensnared the wider Gulf region and set crude prices on fire, could widen India’s current account deficit (CAD) by billions of dollars, as higher energy costs raise the country’s import bill and fuel inflation risks.

Experts warn that a sustained increase in oil prices can quickly worsen India’s balance of payments, which includes trade in goods and services, investment flows, remittances and financial transfers.

According to analysts at Barclays, every $10 a barrel increase in crude can widen India’s current account balance by roughly $9 billion, highlighting the country’s sensitivity to energy shocks.

“For a country with a current account deficit and a large oil import bill, which accounts for about 27 percent of total imports, oil price shocks can quickly put further stress on balance of payments dynamics,” analysts at Barclays said.

Oil and gold push up import bill

High oil and gold imports have also contributed to the widening trade gap. India imported $31.8 billion worth of gold in the October–December quarter, up from $26.3 billion in the previous quarter, reflecting strong domestic demand and higher prices.

A study by the Economic Research Department of State Bank of India estimates that every $10 increase in crude prices could widen India’s CAD by about 36 basis points in FY27.

If oil prices were to climb to around $130 a barrel, India could see a simultaneous deterioration in macroeconomic indicators, with the CAD widening, inflation rising and economic growth slowing, the report by SBI said.

Oil on boil

Global oil prices have been volatile since the conflict escalated. The benchmark Brent crude surged above $110 on March 9, briefly touching $120, the highest since 2022, as energy assets came under fire.

On March 10, the price retreated, dropping to about $91.7 on signals of a possible de-escalation.

US President Donald Trump late on March 9 said that the war, which is in its second week, was “ahead of schedule” and could end “very soon”.

For now, the conflict has heightened risks to shipping through the Strait of Hormuz, a vital energy corridor through which roughly one-fifth of the world’s and 40 percent of India’s oil supply normally passes.

Ratings agency economists also expect the external deficit to widen.

Analysts at CRISIL project India’s CAD to rise to around 1.2 percent of GDP in FY27, compared with about 0.8 percent expected in FY26, citing risks from higher crude prices and weaker global trade.

However, a strong services trade surplus, particularly from IT and business services exports, is likely to keep the deficit manageable despite pressures from commodity imports.

India has been lowering its current account deficit through stronger services exports and robust remittances, with the CAD narrowing from about 2 percent of GDP in FY23 to around 0.6 percent in FY25.

But the external balance has shown some strain in recent quarters.

CAD widened to $13.2 billion in the December quarter, or 1.3 percent of GDP, compared with $11.3 billion or 1.1 percent of GDP in the year-ago quarter.

This was largely driven by a wider merchandise trade deficit, which rose to $93.6 billion in December quarter, as imports grew faster than exports.

Imports stood at $205.3 billion and exports at $111.7 billion, though a strong services trade surplus helped bridge some of the gap.

Despite the quarterly widening, the cumulative CAD for the first three quarters of FY26 stood at $30.1 billion, or 1 percent of GDP, narrower than $36.6 billion (1.3 percent of GDP) in the year-ago period on higher services exports.

The West Asia conflict has renewed concerns about volatility in global energy markets and its implications for large oil-importing economies such as India.