Middle East Conflict Raises Fears of Economic Deterioration, Potential Impact on Indian Stock Market

Middle East Conflict Clouds India's Economic Outlook

The ongoing Middle East war has cast a shadow over the near-term prospects of the Indian economy, raising concerns that the US-Iran conflict may derail the economy's growth momentum, drive inflation higher, and dent corporate profitability, ultimately leading to softer stock market returns.

Crude oil prices have remained above $100 per barrel for over two months, fueling concerns over their negative impact on India's current account deficit, inflation, and GDP growth. The anticipated US-Iran peace talks remain stalled despite diplomatic efforts from both sides. A final resolution to the conflict is essential to ensure a smooth supply of crude oil and LPG through the Strait of Hormuz and bring prices down significantly.

As long as energy prices remain high, market sentiment will remain fragile. The longer the delay in resolving the Middle East conflict, the greater the damage the Indian economy will suffer.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Supply constraints in parts of India's energy basket, coupled with a sharp rise in prices, have created near-term headwinds for economic activity in the first quarter of this fiscal. While the country's large economic base, strong forex reserves, and diversified crude sourcing strategy have helped cushion the impact, this buffer is not unlimited.

Government data already shows two consecutive months of contraction in LPG consumption (year-on-year), along with early signs of softening in aviation turbine fuel demand in April 2026—both pointing to a potential cooling in activity. A prolonged disruption, such as a continued Hormuz Strait blockade, could amplify these trends and, alongside elevated prices, shave 25-35 basis points off GDP growth this year.

However, a timely resolution of conflict and the reopening of Gulf shipping routes by mid-quarter could trigger a swift correction in crude prices and help allay concerns of a broader slowdown in India's economic momentum.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

The Indian economy has been growing by over 7% annually since 2022. However, in the current financial year, the economy can face challenges, mostly due to global factors. In its April policy meeting, the Reserve Bank of India projected India's GDP to grow by 6.9% in FY27. Inflation may stay within its tolerance band of 2-6% as the central bank projected Consumer Price Index (CPI)-based inflation for FY27 at 4.6%.

However, experts believe the Indian economy may see a growth in the range of 6-6.5% in the current financial year. This estimate could be revised downwards if energy prices remain at the current level for a longer period. According to a UN report, the Indian economy is expected to grow 6.4% in FY27. Global brokerage firm UBS has revised its India GDP growth forecast downward to 6.2% for FY27. Standard Chartered Bank has downgraded its growth forecast for the Indian economy from 7.1% to 6.4%, assuming an average crude price of $90 per barrel.

While India's growth momentum is expected to take a hit this year, the country is still expected to remain among the world's fastest-growing major economies. India will not be the only country witnessing a growth slowdown— all major economies in the world are likely to feel the pain of the Middle East tension.

According to Aurelien Kruse, lead economist for India at the World Bank, India will likely remain among the world's fastest-growing major economies in FY27, supported by strong macroeconomic fundamentals. However, the recovery in the economy would be gradual. Moreover, the second and third-order impact of elevated crude oil prices may keep stock market returns modest this year.

Vinit Bolinjkar, Head of Research at Ventura, said the Indian stock market is likely to deliver only modest returns in FY27, with higher volatility as the dominant theme. "Valuations are already richer versus historic norms and emerging-market peers, so any further spike in oil or a weaker rupee could trigger sharp corrections, especially in rate-sensitive and import-dependent segments," said Bolinjkar.

Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, pointed out that a $10 hike in crude oil prices impacts our import bill by roughly $13-14 billion. India was purchasing crude at a price of around $65 before the war broke out. With crude around $100, it will have to shell out an additional $50-60 billion.

Sheth believes it may not be as detrimental as it was during the last major crude spike in 2008. However, the problem always crops up from second and third-order effects, which most market participants fail to factor into their calculations. Crude oil prices will remain extremely volatile and unpredictable until the situation in the Middle East improves. This, along with the second and third-order effects, will keep markets on tenterhooks for the remaining financial year. We expect the Nifty to remain range-bound for the next few months between 26,500 and 22,500," said Sheth.