Iran–Israel Conflict: 3 Major Economic Risks India Must Watch as Crude Volatility Rises

The escalating geopolitical tensions between Iran and Israel have once again pushed global energy markets into uncertainty. For India, which imports over 85% of its crude oil requirements, any disruption in West Asia immediately raises concerns about inflation, the current account deficit, and currency stability. While the immediate impact depends on how long the conflict lasts, economists believe oil price volatility remains the most critical macroeconomic risk for India.

India’s Energy Dependence on West Asia

India’s crude oil supply chain remains heavily dependent on the Middle East. In FY25, Iraq, Saudi Arabia, the UAE and Kuwait accounted for nearly 46% of India’s crude imports. At the same time, geopolitical pressure from the United States has reduced India’s reliance on Russian crude, which earlier accounted for around 35% of imports.

This concentration means that any instability in the Persian Gulf region, particularly near the Strait of Hormuz, can quickly affect India’s energy security and import costs.

Inflation Risk From Rising Oil Prices

Oil prices directly influence transportation, manufacturing costs and overall consumer inflation. According to RBI estimates, a 10% increase in global crude prices could raise inflation by about 0.3 percentage points while reducing GDP growth by roughly 0.15 percentage points. The sensitivity to fuel prices has increased further after the new CPI basket doubled the weight of petrol and diesel to 4.8% from 2.3%.

However, there is a temporary cushion. Oil marketing companies currently have marketing margins of around ₹10 per litre on petrol and ₹4 per litre on diesel, which can absorb price shocks in the short term without immediately passing them on to consumers.

Impact on India’s Current Account Deficit

Another critical macro factor is India’s current account deficit (CAD). Economists estimate that India’s CAD could average 0.9% of GDP in FY26 and 0.8% in FY27, assuming crude prices average about $65 per barrel.

However, oil price spikes can quickly alter this balance. Historically, every 10% increase in crude prices widens India’s CAD by approximately 0.4% of GDP. JM Financial further estimates that every $1 rise in crude oil prices increases India’s annual import bill by nearly $2 billion. Sustained oil price increases could therefore significantly increase India’s external financing needs.

Rupee May Face Short Term Pressure

Beyond trade balances, the bigger concern lies in capital flows.

If global investors shift towards safer assets due to geopolitical risks, emerging markets like India could see foreign institutional investor outflows. This could widen the balance of payments deficit and weaken the rupee. Some economists believe the Reserve Bank of India may need to intervene in currency markets if volatility intensifies.

A Possible Silver Lining for India

Interestingly, some analysts see a longer-term opportunity.

If geopolitical developments lead to sanctions being lifted on Iran, global crude supply could increase significantly. Greater supply could eventually stabilise oil prices, which would benefit major oil importing economies like India.

The Key Variable: Oil Prices

Ultimately, the trajectory of global crude oil prices will determine the scale of the economic impact. Higher crude prices increase inflation risks, widen the current account deficit and weaken the rupee.

For policymakers and investors alike, the next few weeks of oil market movements will be crucial in assessing whether the conflict remains a short-term disruption or evolves into a broader macroeconomic shock for India.