India’s macro story had been looking comfortably “Goldilocks” until now, with growth holding firm, inflation moderating and external risks appearing manageable, only for the Middle East crisis to reintroduce a fresh layer of uncertainty.
Tensions between the US/Israel and Iran escalated sharply over the past few days, reaching a flashpoint after a series of strikes on key locations across Iran, reportedly targeting critical infrastructure and senior leadership. Iran responded with retaliatory attacks on US assets across the Gulf, spanning Kuwait, Bahrain, the UAE, Jordan, Qatar, Saudi Arabia and Iraq. The rapid back-and-forth raised fears that a localized conflict could quickly spill over into a wider regional confrontation.
For markets, the immediate concern was not just geopolitics, but the risk of a major supply-side shock to the global economy. The Strait of Hormuz sits at the heart of this risk. Nearly 27% of global oil supply flows through this narrow passage, but its importance extends well beyond crude. According to the US Energy Information Administration, close to 90% of the oil transiting the Strait is destined for Asia, primarily China and India. In addition, nearly 20% of global LNG supplies also pass through this route, making it one of the most critical chokepoints for global trade.
India’s exposure to the region is particularly significant. Around 47% (roughly US$68 billion) of India’s crude oil and petroleum product imports come from West Asia and the GCC, while nearly 80% (about US$23 billion) of LNG imports are sourced from the GCC. Any prolonged disruption therefore risks spilling over into domestic energy availability, external balances and even fertilizer supplies, especially concerning with the kharif season approaching.
Markets were quick to price in these risks. Oil prices surged by nearly 55–60%, natural gas prices rose over 20%, and fertilizer prices jumped sharply by 33%, reflecting fears of sustained supply disruptions. Unsurprisingly, risk aversion spiked, with volatility rising across global asset classes.
That said, the tone has shifted more recently. Risk sentiment has improved, with investors turning cautiously optimistic after comments from US President Donald Trump suggested that the conflict with Iran could be nearing an end. The possibility of de-escalation has helped ease tail-risk concerns around energy supply shocks and broader geopolitical spillovers. As a result, risky assets have found support, and markets have begun recalibrating for a lower geopolitical risk premium.
The bigger question, however, is whether a pause or even an end—to hostilities is enough to fully reverse the damage. Will supply chains snap back quickly, or will lingering disruptions leave lasting scars on the global economy through the rest of the year?
For India, the implications of a deferred conflict are multifaceted. The country’s ties with the Middle East extend far beyond oil and goods trade, encompassing remittances, tourism and deep diplomatic relationships. The region accounts for around 15% of India’s total goods exports and about 21% of imports. Exports are concentrated in petroleum products, jewellery, aircraft parts, mobiles, rice and auto components, while imports are dominated by crude oil, gold, diamonds, organic chemicals and fertilizers. A de-facto closure—or even partial disruption—of the Strait of Hormuz would extend transit times and push up insurance and freight costs, weighing on trade margins.
Beyond trade, remittances are another key channel of impact. The UAE is India’s second-largest source of inward remittances, contributing roughly one-fifth of total inflows. While higher oil prices are typically associated with stronger remittances from Gulf countries, this episode is different. A prolonged conflict risks dampening economic activity within the Gulf itself, potentially weakening remittance flows rather than boosting them.
Encouragingly, early indicators suggest that the conflict may be winding down, limiting risks to India’s FY2027 macroeconomic outlook. However, if supply constraints persist, the fallout could still show up in the form of a wider current account deficit, capital outflows, fiscal slippages, higher inflation and softer growth.
Policymakers are likely to cushion part of the impact. Measures could include limiting the pass-through of higher fuel prices to consumers, reducing excise duties on petroleum products, ensuring adequate household fuel supplies while restricting industrial usage, and curbing exports of petroleum products amid constrained availability. The RBI, meanwhile, is expected to continue intervening judiciously in FX and bond markets to maintain orderly financial conditions. Globally, policymakers are also exploring options such as easing sanctions, allowing imports from Russia, and considering coordinated releases from strategic petroleum reserves by G7 countries.
Ultimately, episodes like this serve as a stark reminder of India’s heavy dependence on imported raw materials and its vulnerability to global shocks. With geopolitical disruptions becoming more frequent rather than exceptional, there is a growing case for India to adopt a long-term strategy—quicker diversification in favor of renewable energy, building deeper partnerships with global frontrunners to create buffers against future upheavals.