Middle East Tensions and Oil Price Volatility Pose Multiples Risks for India's Economy

India's Economy Under Pressure from Iran Crisis

Key Highlights

• The ongoing Iran crisis has disrupted energy flows, leading to an increase in crude oil prices, which could surge towards $100 a barrel if the Strait of Hormuz remains shut.
• 88% of India's oil requirements are imported, with nearly 50% of crude oil imports and 85% of LNG supplies transiting via the Strait of Hormuz.
• The price of India's oil basket has increased to $85 a barrel from around $70 a barrel before the crisis escalated.
• A rise in crude oil prices by $10 a barrel is estimated to widen the Current Account Deficit (CAD) by around $14-15 billion.

Impact on Current Account Deficit

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• The disruption in energy flows and remittances from the Gulf region could lead to a widening of the CAD/GDP ratio to 1.8-2.0% in the medium term.
• Remittances from Indians working in the Gulf contribute nearly 38% to India's total remittance of around $135-140 billion.
• Exports to the UAE, which account for 8.75% of India's total exports, may face problems due to the crisis.

Foreign Flows and Currency

• The crisis could lead to lower Foreign Portfolio Investment (FPI) flows into Emerging Markets (EMEs).
• The UAE accounts for 5.1% of gross Foreign Direct Investments (FDIs) into India, which could be at risk.
• The depreciation pressure on the Indian Rupee (INR) is expected to continue, with a forecast of 92.25-92.50 by end-March 2026 and a 2.5-3.0% depreciation in FY27.

Inflation and Fiscal Impact

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• The crisis could lead to an increase in retail inflation due to higher input costs for manufacturers using oil derivatives.
• The government's subsidy cost for oil and fertilizers may rise, and the government may need to cut excise duty on oil to absorb the burden within the fiscal.