The development has intensified instability across West Asia and introduced fresh economic risks for large oil-importing nations such as India.
Officials said the Prime Minister’s Office is reviewing the situation with key ministries amid concern that an extended conflict could transmit shocks to the domestic economy through higher crude prices, pressure on public finances and weaker remittance flows from the region.
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Israel-Iran war pushes oil to multi-month highs
Crude prices have already reacted sharply. Oil climbed to levels not seen in months as markets weighed the possibility of supply disruption in one of the world’s most critical producing regions.
Iran accounts for roughly 5% of global oil output. A complete disruption of Iranian supply could lift prices by about 20%, Bloomberg Economics analysts Ziad Daoud and Dina Esfandiary wrote in a report before oil began trading in Asia. They warned that nearly 20% of global oil supply passes through the Strait of Hormuz, and a closure of the waterway could send prices as high as $108 per barrel.
Brent crude futures surged 7% on Monday, reaching $82.37, the highest since January 2025, in the first trading session after the US and Israel launched strikes on Iran and killed Ayatollah Ali Khamenei on Saturday. By 0054 GMT, Brent was trading at $78.24 per barrel, up $5.37 or 7.37%.
If elevated prices persist, the impact would fall heavily on major importers including China, Europe and India, while exporters such as Russia, Canada and Norway would gain, the Bloomberg Economics analysts wrote. In the US, consumers would face higher fuel costs, though the broader economic drag may be smaller because shale production has turned the country into a net oil exporter.
For India, each $1 increase in crude adds roughly $2 billion to the annual import bill, putting pressure on the trade balance, JM Financial noted. Markets may shift from earnings-led trading to oil-driven volatility in the near term. Upstream energy and defence stocks could see relative support, while oil-sensitive sectors such as oil marketing companies, paints, tyres, aviation and chemicals may face margin compression.
Also Read: Oil jumps as Iran conflict escalates, disrupts shipping
Iran-Israel war raises Strait of Hormuz threat
Shipping risks have also intensified. Israel launched a fresh round of strikes on Tehran on Sunday, and Iran responded with additional missile barrages. The confrontation has exposed commercial vessels to collateral damage.
Missiles struck at least three tankers off the Gulf coast, killing one seafarer, according to shipping sources and officials. Data showed that more than 200 vessels, including oil and liquefied natural gas tankers, dropped anchor around the Strait of Hormuz and nearby waters within 24 hours as security concerns mounted.
“With the retaliatory action now evolving to attacks on oil tankers in the Strait of Hormuz, the threat on oil supplies has substantially risen,” ANZ analyst Daniel Hynes said in a note.
Citi analysts expect Brent to trade between $80 and $90 per barrel this week as the conflict continues. Meanwhile, OPEC+ agreed on Sunday to increase oil production modestly by 206,000 barrels per day for April.
The Strait of Hormuz is considered the world’s most strategically important oil transit bottleneck, according to the US Energy Information Administration (EIA). Such chokepoints are narrow maritime corridors along key global shipping lanes through which large volumes of energy supplies move every day. Any disruption, even temporary, can delay cargoes, drive up freight and insurance costs, and trigger spikes in international oil prices. While tankers can sometimes reroute, alternative passages typically involve longer sailing times and higher expenses. In certain cases, there are no viable substitutes. In the same neighbourhood, the Bab el-Mandeb strait, which connects the Red Sea to the Gulf of Aden, is already facing pressure from attacks by Yemen’s Houthi movement.
Also Read: Iran’s leverage is a cautious tale for India
Israel-Iran war and India’s direct energy exposure
The Strait of Hormuz is particularly critical for India. Nearly 20% of global oil flows through the route, and more than 40% of India’s crude imports transit the strait. Any long-lasting disruption would therefore have immediate implications for domestic fuel costs and inflation.
Oil marketing companies may come under pressure to raise petrol, diesel and LPG prices if crude remains elevated for a sustained period. While the government could temporarily absorb part of the shock through tax reductions or subsidies, prolonged high prices would stretch public finances and potentially alter its fiscal deficit trajectory. Infrastructure spending plans may also need reassessment if fuel subsidies expand.
JM Financial said Brent had already climbed to a seven-month high of about $72.8 per barrel amid strike fears. Its scenario analysis suggests limited retaliation could add $5–10 per barrel. Direct damage to Iranian oil infrastructure could raise prices by $10–12. Disruption in Hormuz could push crude above $90, while a broader regional conflict could take prices beyond $100 per barrel.
Media reports have indicated shipping disruptions in the Strait, but confirmation of a complete and sustained closure remains unclear. The probability and duration of any supply interruption remain the decisive variables.
“In the event of prolonged tensions with a longer closure of the strait of Hormuz, there is a possibility for oil to move to a higher range of $90-110 pbl. Historically though, the Strait has never been blockaded for prolonged periods even during wars in the 1980s.,” HDFC Bank said in a note.
HDFC Bank said India has a buffer against immediate supply shocks, with crude inventories estimated to cover around 74 days of consumption. The bank added that the country retains the flexibility to ramp up purchases of Russian oil if required. India had scaled back imports from Russia in recent months, lifting its dependence on West Asia to nearly 50% of total crude sourcing. At the same time, alternative suppliers such as the US — where India has already increased procurement — remain viable options.
However, the bank cautioned that “near-term spikes in oil prices could weigh on the currency” and may also widen the current account deficit if tensions drag on. The deficit is currently projected at around 1% of GDP for FY27. It estimated that a sustained $10 rise in crude prices would expand India’s current account deficit by roughly 40–50 basis points, assuming other factors remain unchanged.
India’s exposure to West Asia is even more pronounced in liquefied natural gas imports. Close to 80% of LNG purchases come from the region, with nearly 60% of that volume transiting through the Strait of Hormuz, underlining the scale of vulnerability if shipping routes are disrupted.
“Refiners may reroute cargoes via pipelines to Red Sea ports, source more oil from Russia, the United States, West Africa and Latin America, and draw on strategic petroleum reserves to cushion short-term shocks, though these alternatives increase costs and transit times,” GTRI said.
Israel-Iran war complicates RBI’s inflation outlook
The timing of the oil shock is delicate. India’s inflation trajectory had improved dramatically over the past year. Headline consumer price inflation eased to 2.1% in June 2025 and reached a historic low of 0.25% in October, remaining well within the Reserve Bank of India’s 2–6% target band. India’s key inflation rate was at 2.75% in January, under a revised data series.
The Economic Survey published this year said that among major Emerging Markets and Developing Economies, India recorded one of the steepest declines in headline inflation in 2025 – about 1.8 percentage points. This cooling occurred alongside robust GDP growth of 8% in the first half of FY2026, pointing to strong macroeconomic conditions without overheating.
Before the escalation in the Middle East, Aurodeep Nandi, India Economist at Nomura, told ET Now that India appeared to be experiencing a rare combination of solid growth and subdued inflation at a time when much of the global economy faced uncertainty.
Higher oil prices now threaten to reverse that balance. A rise in crude would increase transportation costs, lift food prices and raise manufacturing expenses, feeding into broader inflation. That could make it harder for the RBI to cut interest rates later this year, a move that had been widely expected.
Iran-Israel war pressures rupee and markets
The conflict is also likely to affect the currency. A spike in oil prices, rising geopolitical uncertainty and risk-off sentiment globally could weaken the rupee.
The local currency had shown signs of recovery recently. In February, the rupee strengthened for the first time since April 2025, gaining 1% to close at 90.97 per dollar. The improvement was supported by foreign inflows and a US trade deal announced earlier in the month, along with persistent dollar sales by the RBI that kept the currency above the psychological 91-per-dollar mark.
However, the rupee had briefly touched an all-time low of 92 per dollar at the end of January and was the worst-performing Asian currency in 2025. Renewed stress from West Asia could reverse the recent stabilisation.
Bankers told The Economic Times that escalating US-Iran tensions could have consequences for both the rupee and bond yields.
India’s inflation cycle had turned decisively benign. The Iran-Israel conflict has now reintroduced a variable that policymakers cannot control — the price of oil.
HDFC Bank said escalating tensions in West Asia, along with firmer crude prices, are expected to put pressure on the dollar-rupee exchange rate, which last closed at 90.97 on Friday. The bank expects the Reserve Bank of India to step in to curb sharp currency swings in the immediate term. Even so, the USD/INR pair could trade in a 91–93 range in the near future, depending on how the conflict develops, particularly if there are disruptions to oil supplies moving through the Strait of Hormuz. Should the situation cool over the coming week without any sustained supply impact, the rupee could strengthen again, pushing the pair back below 91.
Meanwhile, India could face shortages of gold and rough diamonds as UAE airspace closures disrupt shipments routed through Dubai after US and Israeli strikes on Iran. Dubai is India’s top supplier of rough diamonds and its second-largest gold source. About 800–850 tonnes of gold are imported annually, with 50–60% arriving via Dubai.