Escalating Middle East conflict threatens oil supply routes and inflation, with Brent crude volatility likely to test India’s external balance and fiscal levers, but near-term supply is intact, says brokerage.
The widening US-Iran war, compounded by Iranian missile and drone strikes across the Gulf Cooperation Council region, has intensified global macroeconomic risks and heightened pressure on India’s inflation, current account and broader growth outlook, according to a fresh note from Emkay Global.
The conflict, which has seen strikes extend beyond traditional military targets, “makes this conflict much more serious than last year’s bombings or earlier conflicts like the Israel-Palestine and the Russia-Ukraine war,” the brokerage said, flagging risks to shipping, supply chains and freight and insurance costs even without a formal blockade.
Oil supply, India’s exposure
India is heavily exposed to energy price shocks through its dependence on crude imports from the Middle East, the bulk of which transit the Strait of Hormuz, a maritime chokepoint accounting for roughly 20 per cent of global oil flows. Recent disruptions across the strait have already rattled global energy markets and pushed Brent crude prices upward amid broader Middle East tensions.
Emkay noted that while there are “oil price and supply risks,” immediate shortages remain elusive. “Our energy team’s preliminary checks suggest that India’s crude and LNG supplies remain largely intact,” the report said, adding that diversified sourcing, strategic reserves and operational inventories provide “adequate buffers… to cushion any short-term disruptions.”
Transmission to prices and the economy
The brokerage highlighted how oil price spikes transmit quickly into domestic fuel costs. “For every $1/bbl increase in Brent, we estimate an impact of ~Rs 0.52/litre on diesel and ~Rs 0.55/litre on petrol retail prices,” the report said.
That transmission could amplify inflation already sensitive to energy cost swings and strain households and businesses alike if the conflict persists. Emkay estimates that every $10 per barrel rise from a baseline $65 assumption would widen India’s current account deficit by roughly 0.5 per cent of GDP, exerting additional pressure on the external balance.
Retail and wholesale price index inflation could also absorb ~35 basis points and ~130 basis points, respectively, while growth might be trimmed by 15–20 basis points, ceteris paribus.
These risks come as broader markets react to the geopolitical shock: Indian equities have slid, and the rupee has weakened past the ₹91 mark per US dollar amid higher oil price expectations and risk aversion among investors.
Fiscal stance and government response
On fiscal policy, Emkay said it is “premature to take a definitive view” but that a government excise duty cut to subsidise fuel costs appears unlikely at this stage. Each Rs 1 per litre reduction in excise would imply an annualised fiscal hit of roughly Rs 150 billion, the brokerage noted. Oil marketing companies (OMCs) are viewed as better cushioned than in past cycles, “with earnings from other business segments helping offset oil marketing losses,” reducing expectations of a direct government bailout.
However, prolonged disruption to shipping through the Strait of Hormuz, already a focus of market attention, could keep oil elevated, with some analysts warning Brent could head toward or beyond $100 per barrel if flows remain blocked.
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