The Iran war has unleashed a severe oil shock on India, the world's third-largest oil importer and consumer, driving benchmark crude prices to nearly $120 per barrel and reshaping the country's economic outlook. According to a Business-Today report, India imports about 90% of its crude oil requirements and is among the economies most exposed to disruptions from the conflict and the effective blockade of the Strait of Hormuz, through which nearly a fifth of global oil and gas supplies pass.
Price Surge and Supply Disruption
According to Business-Today, benchmark global crude prices surged to nearly $120 per barrel after the conflict began on February 28. Although prices have since eased, they remain about 30% higher than pre-war levels, while natural gas prices have risen 75%. India's oil and gas import bill jumped 53% in April from March, prompting expectations of a sharp rise in the balance of payments (BoP) deficit. The government has moved to curb gold imports, urged citizens to limit foreign travel and encouraged greater use of public transport to reduce fuel demand.
"India is set for a series of supply shocks," Michael Langham, emerging markets economist at Aberdeen Investments, said, as quoted by Reuters. Apart from higher oil prices, India is also facing fertiliser supply disruptions linked to the conflict, a challenge for key crops such as wheat at a time when farmers are preparing for a possible El Nino weather pattern that often brings drought conditions.
"This will all drag on India’s growth outlook, yet the ability of the RBI to look through the energy price shock from the Strait of Hormuz will be increasingly difficult given the overlapping nature of these supply shocks," Langham added.
Inflation and Growth Outlook
Reflecting these pressures, the Reserve Bank of India (RBI) expects inflation to average 5.1% in FY27, up from 3.48% in April, while economic growth is projected to slow to 6.6% from 7.7% in the previous financial year. The changing outlook marks a reversal from the optimism seen at the end of last year when RBI Governor Sanjay Malhotra described the economy as being in a "rare Goldilocks" phase characterised by easing inflation and resilient growth.
| Indicator | Previous Year | Current FY27 Projection |
|---|---|---|
| CPI Inflation (April) | 3.48% | 5.1% (average) |
| GDP Growth | 7.7% | 6.6% |
| BoP Deficit (2025-26) | $25.2B (0.6% of GDP) | ~$65B (pre-measures) |
According to HSBC, the RBI's latest measures could help limit some of the damage. Before the announcements, the bank had expected India's BoP deficit to widen to about $65 billion in 2026-27. It now estimates the measures could improve the balance by around $30 billion. India's BoP deficit stood at $25.2 billion, or 0.6% of GDP, in 2025-26.
Interest Rate and Market Expectations
Interest-rate markets have shifted. Although the RBI kept rates unchanged last week, swap markets are now pricing in at least 25 basis points of rate hikes over the next three months and more than 75 basis points over the next year.
"India continues to face deeper structural challenges which has weighed on foreign direct investment, employment, manufacturing expansion, consumption, and nominal GDP growth," said Sat Duhra, portfolio manager at Asia ex-Japan equity team at Janus Henderson Investors, as quoted by Reuters. Duhra said the energy shock could hurt both growth and public finances.
"Any move to rein in public-sector capex to stabilise conditions would risk further slowing growth. This leaves policymakers in a difficult position."
India has so far delayed fully passing on higher import costs to consumers. According to Business-Today, petrol and diesel prices have risen by less than 10% since the conflict began, compared with increases of 50% or more in some other oil-importing Asian countries. Although fuel prices are officially deregulated, the government retains significant influence.
Broader Implications for Commodity Traders
The overlapping supply shocks—energy, fertiliser, and potential weather-related crop stress—create a complex risk environment for commodity traders. Elevated crude prices directly impact fuel costs for shipping and agriculture, while fertiliser disruptions threaten Indian wheat output just as global grain markets remain tight. The RBI's inflation forecast of 5.1% and growth slowdown to 6.6% suggest persistent demand-side pressure on industrial commodities, even as monetary policy may tighten. Traders should monitor India's BoP developments and any further government interventions, as these will influence rupee volatility and import parity prices for crude, LNG, and agricultural inputs.
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