(March 2): India’s growth is at risk from the crisis in the Middle East if the conflict endures and disrupts oil supplies from the region that meet a large share of demand in the world’s third-largest oil consumer, economists said.
The standoff entered its third day after the US-Israeli alliance began airstrikes against Iran over the weekend. The continuation of intense missile salvos suggests Tehran may not be ready to discuss concessions, even after its supreme leader and top military officials were killed.
The surge in oil prices after the attacks won’t be immediately reflected in retail prices as India’s oil marketing companies have sufficient margins to absorb such sharp spikes, said Gaura Sengupta, an economist at IDFC First Bank Ltd. Though prices in India are market-linked, state-owned retailers adjust them in line with government guidance, and rates have been unchanged since mid-March 2024.
“Retail fuel prices have not changed for years, both when crude prices were low and when they were high. The administered prices may not change this time either,” Sengupta said.
The Reserve Bank of India estimates that a 10% annualised increase in crude prices could raise inflation by 30 basis points and reduce growth by about 15 basis points, assuming full pass-through to domestic prices. A weaker rupee — down about 5% in calendar year 2025 and sliding on Monday on Iran-related developments — could further pressure inflation, though it may boost growth in the short term through stronger exports.
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Iran supplies about 5% of global oil, and a complete outage would lift crude prices by about 20%, Bloomberg Economics’s Ziad Daoud and Dina Esfandiary wrote in a report. Closure of the Strait of Hormuz could push oil prices as much as US$108 per barrel, they warned.
The main impact of the tensions would be on the current account as the country’s oil import bill rises. But India’s external sector remains robust and any pressure is manageable, RBI Governor Sanjay Malhotra said in an interview Monday.
“Our forex reserves can cover current account deficits over decades,” Malhotra said. India’s foreign exchange reserves stood at a record US$725.7 billion in February, the world's fourth largest, and covered nearly a year of imports.
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A US$10-per-barrel increase in crude prices, sustained for a year, could widen the current account deficit by about 0.4% of gross domestic product, push up inflation and lower the growth rate by about 20 to 25 basis points, said Teresa John, economist with Nirmal Bang Securities. “I don’t think oil prices will sustain at these levels, though,” she said.
The key question remains how long tensions in the Middle East will persist, as oil prices have surged on fears that the Strait of Hormuz, a route for nearly half of India’s roughly 5 million barrels-a-day crude imports, could be effectively closed.
If shipping lines through the Red Sea and key Gulf straits are disrupted, then carriers would have to be rerouted around the Cape of Good Hope, adding 15 to 20 days to transit times and raising costs, said Ajay Sahai, director general of the Federation of Indian Export Organizations.
Even as major oil producers have increased output, Brent crude has rallied as much as 13% to above US$82 a barrel — the highest since January 2025 — while West Texas Intermediate was near US$72 in early Asia trading on Monday. India’s crude basket, a mix of different grades, is generally cheaper than Brent by a little over US$1.
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