Iran-Israel Conflict: A Middle East flashpoint that Indian economy can't ignore

Time of India

18 hours ago

The year 2025 has been a rollercoaster ride for
India
and its economy so far, starting with Maha Kumbh giving a Rs 2.8-lakh-crore push to conflict with Pakistan. Now, another factor has been added - the Israel-Iran war - a development that may have an impact on India's economic outlook for 2025.
A sudden military escalation between
Israel
and
Iran
has pushed global crude oil prices sharply higher, threatening to weaken the Indian rupee, fan inflation, and strain the country's finances.
Brent crude today surged over 12%, nearing $78 per barrel, after Israel launched airstrikes on Iranian military facilities. The global market response was immediate, and for India, the world's third-largest crude importer, the stakes are high.
by Taboola
by Taboola
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How oil shapes the macro economy
The Strait of Hormuz, where much of the world's oil passes through, has emerged as a flashpoint. Any risk to its safe passage instantly affects oil markets. For India, which imports over 80% of its crude requirements, such events have a large impact from inflation risks to trade balances.
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The rupee reacted swiftly. On Friday, it opened at 86.14 per US dollar, weakening 54 paise from the previous day's close of 85.60. The link here is direct - as oil prices rise, Indian refiners need more dollars to pay for shipments. This raises dollar demand, weakens the rupee, and further inflates the cost of oil imports creating a feedback loop that widens the current account deficit.
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JP Morgan warned on Friday that oil may surge to $120 per barrel if the conflict escalates. The bank said this scenario, though currently reflecting only a 7% probability, could result in 'exponential' price increases driven by panic and regional spillover.
DK Srivastava, Chief Policy Advisor at EY India, said, 'The global economy was already beset with supply side disruptions due to the ongoing Russia-Ukraine and Israel-Hamas conflicts. The latter is expanding into an Israel-Iran conflict. The threatened tariff hike by US and related policy uncertainties have further added to economic headwinds, holding global growth down.'
He added, 'India may also be affected by these global trends mainly through the impact on the contribution of net exports to real GDP growth. If tariff-related uncertainties do not get resolved in the near future, this negative contribution of net exports may gather further momentum.'
Srivastava also noted that India's crude oil basket, which had averaged $64.3 per barrel in early 2025-26, could reverse its trend if prices spike again. 'A $10/bbl increase in oil price can reduce real GDP growth by 0.3 percentage points and raise CPI inflation by 0.4 points,' he said. The Reserve Bank of India (RBI), which has reduced the repo rate by 100 basis points since January, may need to reconsider its policy stance if inflation pressures persist.
With oil already up over 12% in a single session, will the impact be visible on the household budgets, too?
Inflation monster back in focus
India's headline inflation had recently eased to 2.82% in May, the lowest since February 2019, all thanks to a favourable monsoon and relatively calm food prices. But with the heatwave back in action in June and the geopolitical situation taking a dramatic turn, that relief may face some risks.
Energy prices, especially fuel, play a hidden but crucial role in the pricing of goods and services. Even if petrol and diesel rates remain steady in the short term due to government intervention, the rising cost of transporting goods and services might slowly feed into the inflation cycle.
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If global crude continues to trend upward, the Reserve Bank of India may find itself under pressure to postpone rate cuts or maintain a tight policy stance. The bond market is already reacting, with yields moving higher in anticipation. For borrowers, this spells higher EMIs and limited refinancing options.
Spotlight on excise duties
India's excise duties on fuel is about Rs 18–20 per litre (for diesel, petrol) and are a major source of government revenue. Past oil shocks have often led the government to reduce these duties temporarily to provide a cushion to the consumers.
This step might be politically popular, however, it comes at a cost. Lower duties mean less tax income, even as the import bill rises because of expensive oil. This could push the fiscal deficit higher.
Wider economic impact
The current spike in energy prices is not limited to crude oil. India's energy import basket also includes LPG, natural gas, petrochemicals, and fertilisers, all of which could face shipping risks and price increases if Middle East tensions worsen.
A disruption in the LPG or fertiliser supply chain could hurt rural households and farm productivity. Fertilisers are essential for agriculture, and any increase in their cost would be passed on to food prices, affecting overall inflation. This could negate the recent price stability observed in food commodities.
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Several manufacturing sectors including aviation, chemicals, paints, tyres, cement, and logistics use petroleum-based inputs and fuels. A significant increase in the price of raw materials such as jet fuel, gasoil, or naphtha will result in reduction of profit margins.
Crisil Ratings' Senior Director, Anuj Sethi also affirmed that the recent escalation in the Israel- Iran conflict is likely to have repercussions on margins. 'The recent escalation in the Israel- Iran conflict has impacted global oil markets, with crude oil prices surging to over $75/bbl. from the softened levels of $65/bbl. seen during May 2025. The repercussions of this price hike are likely to vary across sectors that are directly or indirectly dependent on crude oil."
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"While a surge in oil prices tends to benefit upstream oil exploration and production companies, the reverse effect may be felt by downstream refiners, whose margins could be squeezed due to higher input costs. Similarly, sectors indirectly linked to crude oil – such as petrochemical-based industries (including packaging films, plastic pipes), man-made yarns, paints, specialty chemicals, and tyres could face margin pressures, in case of further increase in crude oil prices, in the event of escalation of the conflict," he added.
Hence, the producers may pass on these costs to consumers or absorb them, both of which have consequences including either reduced affordability for customers or shrink in corporate profits.
Ripple effects on consumers
The economic stress will be felt on the ground too if the situation worsens. With Iran's warning about paying 'heavy price' to Israel, the transporters might be preparing to revise fares upward. Grocery suppliers and wholesalers expect higher logistics bills. Small business owners, especially MSMEs, may face the shrinking margin problem as their input costs rise while consumer demand stays flat.
Gold prices have also reacted to the heightened geopolitical risk. On June 13, domestic gold futures crossed the Rs 1 lakh per 10 grams mark, while global spot prices hovered near $3,383 per ounce. This surge, driven by a weakening rupee and investor flight to safe assets, may take a toll on jewellery sales. Gold jewellery sales in India during April and early May remained subdued, except on the day of Akshaya Tritiya, due to high and volatile gold prices coupled with broader economic uncertainties, according to a World Gold Council (WGC) report. The recent tensions might add to it.
While retail jewellery demand may soften, investment demand is expected to remain intact.
In this evolving situation, the role of India's policy-makers becomes critical. The RBI may intervene in the currency market to prevent excessive rupee depreciation. It also has to weigh the impact of oil-driven inflation against the risk of a growth slowdown.
The central government will have to take a call on whether to cut excise duties, offer targeted subsidies, or rework spending priorities to accommodate rising energy costs. The challenge lies in protecting households from the oil shock without losing control over the fiscal deficit.
Key uncertainties ahead
Several variables will shape the eventual economic fallout:
The geopolitical trajectory
: If the Israel-Iran conflict expands, oil could climb further higher.
Global shipping lanes
: Any disruption, especially through the Strait of Hormuz, would worsen energy costs.
Domestic policy
: Excise duty adjustments and RBI's rate decisions will determine how deeply inflation spreads.
Capital movement
: Continued foreign inflows can stabilise the rupee, while outflows could worsen currency pressures.
Global interest rates
: A strong dollar and high US yields could drive capital away from emerging markets like India.
The Israel-Iran conflict may have erupted thousands of kilometres away, but its tremors might be felt across India's economy, from refinery floors to rural kitchens. Oil, often called the lifeblood of the modern economy, carries with it complex consequences when prices spike.