US strike on Iran raises oil shock, capital flow risks for India's economy

Mint

22-06-2025

New Delhi: The flare-up in West Asia following US missile strikes on Iran's nuclear facilities has heightened geopolitical tensions and intensified external risks to India's economy, even as many analysts say the escalation may prove short-lived.
At stake for India is the potential fallout from surging oil prices, a widening current account deficit, higher energy and shipping costs fuelling domestic inflation, investor risk aversion, capital outflows, and broader risks to economic growth.
'The bigger impact will be on sentiment. However, oil intensity has been going down structurally. For India too, the share of oil imports in total imports has come down from 21% in 2018 to 16.5% in 2025," said Sachchidanand Shukla, group chief economist at Larsen & Toubro.
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Shukla added that India can absorb oil prices up to $85 a barrel without triggering large macro imbalances. 'There is no need to panic and one needs to keep an eye on how the situation evolves," he said.
In a televised address on Sunday (India time), US President Donald Trump confirmed the direct American assault on Iran's nuclear programme, ending days of speculation about Washington's entry into the Israel-Iran conflict. He warned that further strikes could follow.
'Remember, there are many targets left. Tonight was the most difficult of them all by far, and perhaps the most lethal. But if peace doesn't come quickly we will go to those other targets with precision, speed and skill," Trump said.
Oil price spike the immediate risk
A sustained rise in oil prices remains the most visible risk for India, which relies on imports for nearly 85% of its crude oil needs. Higher global prices can widen India's current account deficit, fuel domestic inflation, trigger risk aversion among investors, and slow down growth.
'Every sustained 10% rise in oil price versus the baseline can lower India's GDP by 15 basis points (bps) and raise inflation measured by Consumer Price Index (CPI) by 30bps. On the other hand, it can reduce global GDP by 15 bps and raise CPI by 40 bps which can impede the rate cut trajectory," explained Shukla.
While crude prices have already risen from $64–65 per barrel to $74–75 since the Israel-Iran conflict erupted on 13 June, some offsetting factors remain in play.
Read this | US attack on Iranian nuclear sites roils oil market, India braces for possible price surge
Experts noted that oil supply from the Organization of the Petroleum Exporting Countries Plus (Opec+) is improving as members unwind voluntary production cuts. Crude output from Opec+ rose by 180,000 barrels per day in May compared to April, according to the cartel's latest monthly oil market report.
This production rebound, experts said, could help cap sharp price spikes, provided the conflict does not escalate further.
'The current flare-up may be short-lived and could even mark a turning point in the West Asia crisis towards its early closure, given the substantial disparity in conventional military capabilities, though the complex regional dynamics suggest multiple pathways for conflict evolution," said Rishi Shah, Partner and Economic Advisory Services Leader, Grant Thornton Bharat.
'As things stand today, there may be regional disturbances but these appear unlikely to translate into a major negative shock for India's economy," said Shah.
On the trade front, while treaty negotiations continue, commercial flows seem to be adapting and progressing despite the tensions, he added.
"Therefore, based on current developments and assuming the conflict remains contained, we expect the net external impact on India's growth trajectory to be relatively muted in the near term — though this assessment remains contingent on the conflict not escalating significantly or disrupting critical energy supply routes," said Shah.
Prolonged conflict could hit growth
Economists warn that a prolonged conflict could have deeper consequences.
'For oil-importing countries like India, this means slightly higher inflation and increased fiscal costs. While we have some buffer, with inflation currently below 4%, expectations have suddenly firmed up," said NR Bhanumurthy, director of the Madras School of Economics.
Bhanumurthy cautioned that the current account deficit could widen not just due to the oil import bill, but also from potential pressure on remittances and capital flows. 'CAD will be a key concern going forward," he said, adding that fiscal support may be needed to absorb part of the oil price shock.
'A sustained flare-up in the conflict poses upside risks for estimates of crude oil prices, and India's net oil imports and the current account deficit. A $10/bbl increase in the average price of crude oil for the fiscal will typically push up net oil imports by ~$13-14 billion during the year, enlarging the CAD (current account deficit) by 0.3% of GDP," rating agency Icra Ltd had noted in an earlier report.
Oil marketing companies and the government can absorb some of the costs in the short term, Bhanumurthy said. 'There will be fiscal implications, but we do have some fiscal space as we have exceeded fiscal targets in the last two years," he added.
A sharp oil price rise could also weigh on foreign inflows and hurt domestic investment sentiment, he warned.
A similar note of caution was sounded by Madan Sabnavis, chief economist at Bank of Baroda, who said that if crude prices stay above $80 for long, the trade deficit will widen and the rupee will come under pressure.
"Wholesale inflation will rise accordingly, but the impact on retail inflation will depend on how the government manages fuel prices," he said, adding that excise cuts, if implemented to shield consumers, would widen the fiscal deficit — 'one that can be absorbed."
India's current account deficit edged up to $11.5 billion, or 1.1% of GDP, in Q3 FY25 compared to $10.4 billion a year earlier. Retail inflation eased to 2.82% in May, while wholesale price inflation fell to a 14-month low of 0.39%.
Icra Ratings on Friday warned that oil is expected to average between $70 and $80 per barrel in FY26, and any sustained rise beyond current levels could weigh on India's growth outlook.
Shipping watches Hormuz chokepoint
The Strait of Hormuz remains a key chokepoint for global energy and container trade, with Indian shipping companies monitoring the situation closely.
'But operations and movement of ships as of now has remained unaffected in the region. We have not yet received any alerts from either UK Maritime Trade Operations that patrols the area or the Indian Directorate General of Shipping," said Anil Devli, CEO, Indian National Shipowners' Association.
Even before the latest flare-up, some ships had begun avoiding the strait, pushing up freight rates and crew costs amid rising security risks.
Read this | Mint Explainer | Strait of Hormuz: Will Iran shut the vital oil artery of the world?
Any blockade could spike global energy prices, disrupt supply chains, and hit container trade across the Persian Gulf, South Asia, and East Africa. India is also watching its strategic asset in the region — Chabahar Port in Iran — closely.
'Operations at the port, located near Iran's southeastern border with Pakistan, remain unaffected and normal," an India Ports Global Ltd official said.
Meanwhile, Adani Group's Haifa Port in Israel remains fully functional despite the ongoing conflict. 'Earlier strikes caused minor shrapnel damage nearby, but operations were unaffected," another official said.
Haifa handles over 30% of Israel's imports and contributes about 5% to Adani Ports' revenue, though it accounts for less than 2% of cargo volumes.
Rice exporters brace for fallouts
Beyond oil, India's basmati rice exporters are facing uncertainty as Iran, a key buyer, may scale back purchases if tensions persist.
Iran typically imports around 1 million tonnes of basmati rice annually from India, accounting for roughly a fifth of India's total basmati exports by volume. Several shipments are currently lying at Indian ports, with exporters hesitant to dispatch consignments amid growing uncertainty.
"We are in a catch-22 situation. Amid escalation of tension, many of the exporters, whose shipments are lying at port have kept shipments on hold. If the current situation persists, exporters would be on the receiving end," said Satish Goel, President, All India Rice Exporters Association (AIREA).
India's rice exports to Iran rose to $757.3 million in FY25 from $689.8 million a year earlier, accounting for three-fourths of India's total farm exports to the country.
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The timing makes the situation especially sensitive — mid-June to mid-July is peak season for exports, just ahead of Iran's domestic harvest. 'This is a peak season, as in the middle of July Iran might temporarily ban shipments to protect their domestic farmers and ensure fair prices for their harvest," Goel added.
'This is a common practice, particularly during the harvest season, and is aimed at supporting local agriculture by reducing competition from foreign imports. The ban is usually lifted once the domestic harvest is sold."
Vijay C Roy and Dhirendra Kumar contributed to this story