The Indian rupee fell to a fresh lifetime low of 92.33 per dollar, despite intervention by the Reserve Bank of India (RBI), while benchmark indices Sensex and Nifty slid nearly 3% before paring losses a bit, hitting their lowest levels in almost 11 months. The trigger was a dramatic surge in crude prices after fears of supply disruptions intensified in the Middle East. Brent crude jumped more than 25% to around $117 a barrel, extending a rally that has pushed prices up more than 50% since the outbreak of the US-Israeli war on Iran.
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For India, which imports most of its oil, the combination of soaring crude prices, a weakening rupee and falling equity markets represents a triple shock. Economists warn that if the geopolitical crisis persists, the impact could extend beyond financial markets into inflation, fiscal balances, corporate earnings and economic growth.
The oil shock
The most immediate pressure point for the Indian economy is the surge in oil prices. India imports more than 89% of its crude oil requirements, making energy costs one of the most sensitive variables for the country’s macroeconomic stability. When oil prices rise sharply, the impact cascades through multiple channels. The import bill increases, inflation rises, corporate margins come under pressure and the current account deficit widens.
Those risks have intensified dramatically over the past week. Brent crude has surged as markets price in the possibility of supply disruptions from the Gulf region. Much of the concern revolves around the Strait of Hormuz, a narrow waterway through which a significant share of the world’s oil exports passes. About 2.6 million barrels per day of India’s crude imports typically pass through this corridor, making it a critical artery for the country’s energy supplies.
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The worst-case scenario for global energy markets could be far more severe. In an interview with the Financial Times a few days ago, Qatar’s energy minister Saad al-Kaabi warned that crude prices could surge to as high as $150 per barrel if the conflict intensifies and disrupts Gulf energy exports. He added that a prolonged war could force major producers to halt production within weeks and that even if hostilities stopped immediately, it could take weeks to months for normal energy delivery cycles to resume after infrastructure damage.
Brokerages have begun modelling similar extreme scenarios. Analysts at DBS Bank recently said crude prices could climb into the $100–$150 per barrel range if shipping through the Strait of Hormuz is significantly disrupted.
For oil-importing economies like India, such a surge would be particularly damaging. According to analysts at ING, even a 10% increase in oil prices can worsen the external balances of emerging economies by 40-60 basis points, placing pressure on currencies and capital flows.
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Rupee flounders
The oil rally has quickly translated into stress in the currency market. Higher crude prices increase the demand for dollars from oil importers, while geopolitical uncertainty drives global investors toward safe-haven assets such as the US dollar. The result is a powerful double pressure on emerging-market currencies, including the rupee.
Despite pre-market intervention by the RBI, the currency slipped to 92.33 per dollar, a new record low. Reuters reported that the central bank sold dollars to smooth volatility, but the currency continued to face heavy demand from importers and investors seeking safety. Currency strategists say the underlying mechanics are straightforward. A surge in crude prices inflates the import bill, widening the current account deficit and increasing the demand for foreign exchange. At the same time, global risk aversion tends to trigger foreign capital outflows from emerging markets.
The finance ministry acknowledged this risk in its latest economic review, noting that subdued capital flows and a global flight to safety could put additional pressure on the rupee if the geopolitical crisis continues.
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Before the oil jolt, markets were riding on hope
The sell-off in Indian equities is particularly striking because it comes after a period of strengthening corporate fundamentals. Corporate earnings had been showing clear signs of recovery over the past year. According to brokerage Motilal Oswal, the December quarter marked the fourth consecutive quarter of double-digit profit growth for Indian companies, reflecting a broad-based improvement across sectors. Out of 27 sectors under its coverage, 19 recorded double-digit profit growth, while only three reported a decline in profit after tax. Analysts had noted that earnings downgrades seen earlier in the year were gradually giving way to upgrades as domestic demand improved and input costs eased.
On the back of these trends, the brokerage expected around 12% earnings growth for Nifty companies between FY25 and FY27, with valuations remaining broadly aligned with long-term averages.
But the oil shock threatens to disrupt that trajectory. Higher energy prices raise operating costs across a wide swathe of industries, including aviation, transportation, chemicals, manufacturing and logistics. Companies that rely heavily on petroleum-based inputs could see margins shrink if the cost increase cannot be passed on to consumers. At the same time, higher fuel prices reduce household purchasing power, potentially weakening consumption demand. In addition, a weakening rupee jacks up the cost of foreign debt of corporates, further weighing on balance sheets.
This dynamic partly explains Monday’s market reaction. Both Sensex and Nifty plunged nearly 3%, reflecting investor fears that rising crude prices could erode corporate profitability and derail the earnings recovery that had been supporting valuations.
Foreign portfolio investors have also been accelerating outflows as global markets shift toward safer assets amid geopolitical uncertainty.
The wider economic impact
If high oil prices persist, the impact will extend beyond currency and equity markets. One of the most immediate risks is inflation. Higher fuel costs ripple through the economy by increasing transportation and logistics expenses, which in turn push up the prices of goods and services.
Government finances could also come under pressure. Rising crude prices increase subsidy burdens on fertilisers and petroleum products, potentially complicating fiscal management.
Another area of concern is the current account deficit. A sustained increase in oil prices significantly raises India’s import bill, widening the gap between imports and exports.
Economists also warn of secondary effects linked to the Gulf region. About 13.7% of India’s refined petroleum exports go to Gulf countries, and the region is also a major source of remittances from Indian workers. Disruptions to economic activity in the region could therefore affect both export revenues and remittance flows.
India’s oil strategy
Despite these risks, policymakers say India is entering this crisis with stronger macroeconomic fundamentals than in previous periods of turbulence in West Asia.
According to government data cited by ANI, India currently maintains a combined buffer of over 250 million barrels of crude oil and refined petroleum products, equivalent to about seven to eight weeks of supply across the energy chain. These reserves are stored across strategic underground caverns in Mangalore, Padur and Visakhapatnam as well as in above-ground storage facilities and offshore vessels.
The government has also sought to reduce its dependence on any single supply route or region. Over the past decade, India has diversified crude sourcing from 27 countries to around 40, bringing in supplies from Russia, West Africa, the Americas and Central Asia in addition to the Gulf.
This diversification has reduced the share of oil that must pass through the Strait of Hormuz. Government assessments suggest that about 60% of India’s crude imports now arrive via alternative routes, limiting the direct exposure to disruptions in the strait.
Officials also note that the country’s macroeconomic position remains relatively stable. The current account deficit stood at 0.8% of GDP in the first half of FY26, inflation has remained moderate and foreign exchange reserves provide a buffer against currency volatility.
Domestic tailwinds and external headwinds
The broader outlook for the Indian economy remains positive, at least for now. India is entering FY27 with a strong macroeconomic backdrop, unlike during previous periods of turbulence in the Gulf region, the finance ministry said on Friday, but cautioning that a drawn-out conflict could have implications for the economy.
In its monthly economic review for February, the ministry said the economy is supported by solid growth, moderate inflation, healthy credit expansion, a controlled fiscal deficit and stable external sector conditions. However, the report cautioned that a prolonged crisis could have material implications for the exchange rate and the current account deficit, while also fuelling inflationary pressures. “Subdued capital flows, accentuated by a flight to safety, could put pressure on the currency. Some sectors dependent on LNG and crude, like fertilisers and petrochemicals, could be affected if the crisis is prolonged,” the report noted.
Despite high dependence on crude oil imports, the country has sufficient foreign exchange reserves, a low current account deficit (CAD), which stood at 0.8% of GDP in H1FY26, and low inflation rates, which provide a cushion and help safeguard domestic energy security, the ministry said in the review. Strong macroeconomic fundamentals and sustained reform momentum, it added, position the economy well for expansion. However, it noted that external developments, including global growth conditions, trade dynamics, commodity price movements and geopolitical factors, will continue to shape the outlook. The government had raised FY27 real gross domestic product (GDP) growth projections to 7-7.4% from 6.8-7.2% estimated in the economic survey. The Indian economy is likely to grow 7.6% in FY26, according to second advance estimates released last month. The ministry said that due to the depreciation of the rupee in FY26 and a decline in nominal GDP to Rs 345.5 lakh crore from Rs 357.1 lakh crore, India may likely become the world’s fourth-largest economy in FY28.
The ministry also highlighted stability in the external sector despite global trade uncertainty. It said India’s active trade diplomacy, including progress on the India-European Union free trade agreement (FTA), the India-US Interim Trade Arrangement and the India-Oman Comprehensive Economic Partnership Agreement, along with budget initiatives to improve trade facilitation, logistics efficiency and export competitiveness, will help diversify export markets and strengthen external resilience over the medium term.
The simultaneous stress in crude prices, the rupee and equity markets may represent the first signs of a broader economic shock if the Iran conflict continues. For now, India’s buffers, from foreign exchange reserves to diversified energy sourcing, offer a degree of protection. But as the latest events have shown, the country’s economic outlook remains closely tied to the stability of global energy markets and geopolitical developments in the Gulf.
(With inputs from agencies)