How Iran-Israel Conflict Impacts Indian Economy, Inflation & Trade

Iran-Israel Conflict Impact on India Latest News

• Just as global trade was stabilizing with shipping returning to the Red Sea, the Iran-Israel conflict has reignited fears of oil price surges and trade disruptions. 
• The Sensex dropped 573 points amid global market jitters. Experts caution that Iran could block the Strait of Hormuz — a vital route for 20–25% of global oil and key LNG exports from Qatar and the UAE, both crucial to India’s energy needs.

Impact of Iran-Israel Crisis on Indian Economy

• The escalating Israel-Iran conflict adds another layer of uncertainty, potentially affecting India’s economic outlook in the coming months.

Growth and Inflation at Risk

• The escalating Iran-Israel conflict may create macroeconomic challenges for India, particularly due to its heavy reliance on oil imports. 
• A $10/bbl increase could lower India’s real GDP growth by 0.3 percentage points and raise consumer inflation by 0.4 points.
• This threatens to reverse India’s recent inflation relief — retail inflation had eased to a 75-month low of 2.82% in May 2025, prompting a 50 basis point repo rate cut by the RBI. 
• As oil prices climb, Indian refiners require more dollars to purchase crude, increasing dollar demand, weakening the rupee, and inflating import costs — creating a feedback loop that worsens India’s current account deficit.

Energy Supply Disruption Concerns Grow

• Although energy infrastructure has not yet been directly targeted, risks remain high. 
  • Iran reported no immediate damage to its refineries, which have a capacity of 2.8 million barrels/day. 
• Still, its crude exports may drop below 1.5 million b/d this month, as per S&P Global, adding further uncertainty to global energy markets.

Broader Energy Price Spike Beyond Crude Oil

• The ongoing Middle East conflict has triggered a surge not only in crude oil prices but also in other critical energy imports for India — including LPG, natural gas, petrochemicals, and fertilisers. 
• Any disruption could significantly impact India’s rural economy and food inflation due to increased fertiliser costs.

Rural and Agricultural Impact

• Higher fertiliser and LPG prices threaten to burden rural households and reduce farm productivity. 
• This could reverse recent gains in food price stability and drive overall inflation upward.

Manufacturing and Industrial Sectors Face Margin Pressures

• Key sectors like aviation, chemicals, paints, tyres, cement, and logistics — all heavily reliant on petroleum-based inputs — are likely to see reduced profit margins due to rising raw material costs. 
• Crisil Ratings warns that the impact may differ across sectors depending on their oil dependency.

Sectoral Divide: Winners and Losers

• While upstream oil companies may benefit from higher crude prices, downstream refiners could see their margins squeezed. 
• Industries indirectly linked to crude oil — including packaging, plastic products, paints, and specialty chemicals — may pass on the cost to consumers or absorb it, affecting demand or profits respectively.

Rising Costs for MSMEs and Consumers

• If tensions escalate, transport fares and logistics costs may rise, hitting grocery supply chains and increasing costs for MSMEs. 
• These businesses may struggle with higher input costs and stagnant demand, leading to tighter margins.

Gold Prices Soar Amid Uncertainty

• Gold futures in India crossed ₹1 lakh per 10 grams, driven by a weak rupee and investor flight to safe assets. 
• Retail jewellery demand remains subdued due to high prices, though investment demand is expected to stay strong.

Red Sea Relief Short-Lived as Conflict Escalates

• In May, exporters were optimistic as conditions in the Red Sea improved and normal shipping resumed. 
• However, with that confrontation now a reality, traders’ fears have materialised.
• For India — which imports over 80% of its crude — this poses significant macroeconomic risks.

Freight Rates and Insurance Costs Set to Surge

• With vessels likely reverting to the longer Cape of Good Hope route, shipping costs are expected to stay high. 
• The detour adds 10–14 days per voyage, straining vessel availability and driving up freight rates and insurance premiums.

LNG Shipping Severely Impacted

• LNG flows through the Suez Canal plummeted from 34.94 million tonnes in 2022 to just 4.15 million tonnes in 2024. 
• Meanwhile, LNG volumes via the Cape route surged over five-fold — from 11.76 million tonnes in 2022 to 59.37 million tonnes in 2024. 
• This shift underscores the growing logistical burden and potential energy supply risks for countries like India.

Source: IE | ET