West Asia Escalation Puts India’s Macros to Test as Oil Shock Looms

Following the intense coordinated military attack by the US and Israel against Iran and heightened geopolitical tensions, India is facing mounting fears of an oil shock impacting the economy. The military attack took the life of Iran’s supremo Ayatollah Ali Khamenei, leading to severe destabilisation of the region, the shutdown of the Strait of Hormuz, and disruption of the global supply chain.

The Strait of Hormuz is a strategic location, accounting for 20% of global trade routes, and nearly 40% of India’s crude oil import shipments pass through it.

In 2025, over 14 million barrels passed through the Strait every day, of which a third were shipments to major Asian economies, including China, India, Japan, and South Korea.

After intense pressure from the US and other Western allies, India reduced its dependence on discounted crude imports from Russia. New Delhi was actively diversifying its suppliers, especially rerouting to West Asia. The gravity of the geopolitical escalation has now put India in a difficult position.

Crude Spike and Current Account Pressure

The escalation in West Asia has already sent markets across Asia plunging, sending shockwaves through the global oil, aviation, and shipping sectors. Global crude oil prices rose as much as 7% in early trade, with the benchmark Brent crude crossing $84 per barrel, the highest in months.

Market analysts and traders warn that a prolonged shutdown of the Strait of Hormuz could send oil prices as high as $100–$110 per barrel. India imports nearly 90% of its crude oil to meet its energy requirements. A rise in crude prices will heavily weigh on India’s current account deficit and put immense pressure on the rupee.

Inflation and Fiscal Risks

“The situation in West Asia is unfolding, and the extent to which it prolongs and widens will have a bearing on India's macroeconomic indicators, including the impact of fuel prices on inflation and the twin deficits, as well as remittances,” Aditi Nayar, Chief Economist at ICRA, said.

As per market analysts, a $1 per barrel increase in oil prices could raise India’s oil import bill by $1.8–2 billion on an annual basis.

“If the oil price sustains at USD 90 per barrel or above in the upcoming months, this would add ~0.3–0.4% to our baseline current account deficit (CAD) of 0.9% of GDP in FY27E. Long term, if remittances from the Gulf countries (GCCs) fall, a more potent threat will emerge, as GCC countries form 35–37% of total remittances to India,” Elara Capital said in a brokerage report.

External Buffers and Strategic Reserves

Diversification of crude suppliers is also viable, sourcing from the US, West Africa, and the Americas. However, oil from these countries is usually more expensive and must travel longer distances, costing higher freight prices and commodity prices.

According to data from Kpler, India has crude stockpiles of nearly 100 million barrels, in addition to 39 million barrels in strategic reserves. This combined reserve is expected to cover requirements of 60 days of imports in case of a supply chain disruption, according to the data.

LNG and Structural Energy Vulnerability

India’s import bill will face further pressure owing to imports of liquefied petroleum gas (LPG) and liquefied natural gas (LNG), where the dependence on the Strait of Hormuz is higher than for crude.

According to reports, nearly 60% of India’s LNG imports are shipped via the Strait. “The more structural vulnerability lies on the LPG side,” said Nikhil Dubey, Senior Research Analyst for Refining and Modelling at Kpler. Unlike crude, India does not have any strategic LPG reserves, Dubey added, making the supply chain “significantly more sensitive to regional instability.”

A higher import bill due to a sustained rise in oil prices could also complicate the fiscal math of countries, especially emerging market (EM) economies. “In India, the marketing margins of oil marketing companies would come under pressure, and they may require government support if higher oil prices sustain,” Nomura said in a report dated March 1.

Nomura noted that while the Reserve Bank of India (RBI) estimates a 10% rise in global crude prices trims GDP growth by around 15 basis points (bps) and lifts inflation by 30 bps — based on the old CPI series — the revised inflation basket has doubled the weight of petrol and diesel to 4.8%, potentially increasing CPI sensitivity to oil shocks if fully passed through.

However, with retail fuel prices unofficially pegged and oil marketing companies (OMCs) currently enjoying marketing margins of ₹10 per litre on petrol and ₹4 per litre on diesel, there remains a buffer to absorb higher crude costs, limiting the near-term impact on inflation and growth to around 100 bps.

On the external front, Nomura expects India’s current account deficit to remain contained at about 0.9% of GDP in FY26 and 0.8% in FY27, assuming crude averages $65 per barrel, though every 10% increase in oil prices could widen the CAD by 0.4% of GDP.

Remittances and Capital Account Risk

While the primary shock of the West Asia conflict is felt through the current account via higher oil import bills, a bigger vulnerability is the risk to the capital account, which emerges from the potential erosion of private remittances.

In FY25, India emerged as the world's largest recipient, with record inflows of $135.4 billion, a portion coming from West Asia. The Gulf Cooperation Council (GCC) remains a critical pillar, contributing roughly 38% of total remittances.

When coupled with aggressive risk-averse sentiment among investors, who withdrew ₹75.36 billion (₹7,536 crore) from domestic markets on Friday, the capital account faces a dual dilemma of “fleeing hot money” and “stagnating stable receipts.” This, coupled with a strengthening dollar on safe-haven demand, will make protecting the rupee at the ₹91.50 level significantly more expensive and dependent on direct forex intervention by the RBI.