Why the Israel-Iran Conflict Matters to India’s Economy

The recent military escalation between Israel and Iran has sent shockwaves through global oil markets and India, with its heavy reliance on crude imports, is directly in the firing line. On June 13, Brent crude spiked over 9% intraday, rising from $75 to $82 per barrel, its sharpest jump since the Russia-Ukraine war.

This geopolitical flashpoint, centered around the Strait of Hormuz a key artery for global oil trade could deliver a serious macroeconomic jolt to India. Inflation, currency depreciation, trade deficits, and interest rate policies all hang in the balance.

Crude Oil Price Surge to Spike India’s Inflation

India imports over 85%+ of its crude oil, making its economy highly vulnerable to external price shocks. According to RBI-linked models, a $10 per barrel increase in crude oil can raise India’s retail inflation (CPI) by 0.50% to 0.60%.

Oil price inflation doesn’t just hit petrol and diesel it seeps into food transportation, logistics, manufacturing, and daily essentials. So far, state-run oil marketing companies (OMCs) have not passed the hike to retail consumers. But if Brent stays elevated, petrol and diesel prices will rise, making inflation a household concern.

Rupee Under Pressure: Import Costs to Rise

As investors flee to safe-haven assets like the US Dollar, the Indian Rupee weakened to ₹84.65/USD, touching a multi-month low. A weaker rupee increases the cost of all imports, from crude oil to semiconductors and industrial machinery.

This double whammy rising oil prices and a falling rupee threatens to widen India’s trade deficit and further strain the current account deficit (CAD). For an economy already balancing post-pandemic recovery with global volatility, this could be a major setback.

Middle East Airspace Restrictions to Hike Flight Costs

The escalation has also affected global aviation routes. Following Iran and Iraq’s airspace restrictions, flights from India to Europe and North America are now being rerouted, leading to longer flight durations and higher fuel burn.

The aviation sector, already battling cost pressures, is likely to pass on these additional expenses to passengers, resulting in more expensive international airfares in the coming weeks.

RBI’s Rate-Cut Cycle May Face a Pause

The Reserve Bank of India (RBI) has already cut interest rates by 100 basis points in 2025 to support growth. However, if inflation climbs back to 5.5%–6%, the central bank may be forced to pause or delay further rate cuts.

This could directly impact rate-sensitive sectors such as real estate, automobiles, and MSMEs, which were counting on cheaper loans to drive demand. Monetary policy will now walk a tightrope between controlling inflation and supporting growth.

India’s Oil Dependence: A Strategic Weakness

The Strait of Hormuz, where military tensions are flaring, is responsible for over 20% of global oil trade. Any long-term disruption or blockade by Iran could push oil prices toward $100 per barrel, as suggested by global analysts.

India’s lack of large domestic oil reserves puts it at a disadvantage compared to the U.S. and China, who have stronger energy buffers and larger strategic petroleum reserves (SPR). This conflict exposes India’s strategic vulnerability in energy security.

Macroeconomic Indicators to Watch Closely

1. Brent Crude Price – Sustained levels above $85/barrel will raise inflationary pressures.

2. Rupee vs Dollar – Further depreciation could trigger RBI intervention and foreign outflows.

3. Retail Fuel Prices – If hikes are passed on, expect higher CPI and consumer discontent.

4. RBI Policy Meet – Likely to adopt a more cautious tone on rate cuts.

5. Trade and CAD Data – A worsening trade balance may lead to FX reserve depletion.

   
   

Conclusion: A Global Flashpoint, A Domestic Challenge

The Israel-Iran conflict is not just a foreign affairs headline it’s a direct threat to India’s economic stability. With crude oil surging, inflation rising, and the rupee weakening, policymakers face a high-stakes challenge to protect growth while maintaining macro stability.

The coming weeks will be crucial. Markets will track not just diplomatic developments in the Middle East, but also domestic policy responses from the RBI’s monetary strategy to how India manages fuel prices and forex reserves. One thing is clear: energy geopolitics has returned to center stage, and India cannot afford to look away.

Sources:

Reserve Bank of India (MPC Minutes, June 2025)

Bloomberg Energy Data

Ministry of Petroleum and Natural Gas (India)

EIA (U.S. Energy Information Administration)

Nomura India Inflation Sensitivity Report

Flightradar24, Reuters War Updates