SUKUMAR SAH
NEW DELHI: The escalating conflict between the United States, Israel and Iran is rapidly spilling beyond the battlefield into global energy markets, trade routes and financial systems —sending shockwaves through economies heavily dependent on imported oil.
For India, the fallout is already visible in tumbling equities, a weakening rupee and rising concerns that a prolonged war could ignite inflation and widen the current account deficit. Washington and Tel Aviv have signalled that the campaign against Iran could continue for weeks, raising fears of sustained disruption in one of the world’s most critical energy corridors. Iran, on its part, has warned that the US and Israeli interests across the region will face retaliation, raising the spectre of attacks on energy infrastructure and shipping lanes.
At the centre of global anxiety is the Strait of Hormuz, the narrow Gulf waterway through which nearly 20 per cent of the world’s oil shipments pass. Any disruption to tanker traffic through this chokepoint could choke off supplies from Saudi Arabia, Iraq, Kuwait and the United Arab Emirates, triggering a sharp spike in crude prices and freight costs.
Energy traders are exploring alternative routes and strategic reserves to cushion potential supply disruptions. The ripple effects are being felt across global supply chains as transport and insurance costs climb.
Indian financial markets have reacted swiftly. Between the close of February 28 and March 4, the benchmark BSE Sensex slid roughly 2,000-3,000 points, or nearly 3-4 per cent, while the Nifty 50 dropped about 700-900 points, briefly slipping toward the 24,300 level. The sell-off intensified on March 2 and March 4, wiping out an estimated ₹10-15 lakh crore in market capitalisation across the broader market. Early trade on March 5 showed tentative signs of stabilisation, with the Sensex rising about 400-500 points and the Nifty
climbing back above 24,600 as bargain hunting emerged in metals, oil and gas and select large-cap stocks. Analysts, however, warn that the underlying sentiment remains fragile.
The pressure is also evident in currency markets. The rupee has weakened from around ₹90 per dollar at the onset of the crisis to nearly ₹92, its weakest level on record. Dealers said state-run banks were seen selling dollars in early trade, signalling possible intervention by the Reserve Bank of India (RBI) to smoothen volatility. Since the conflict began, the rupee has depreciated roughly 2-2.5 per cent, reflecting higher oil import demand for dollars as well as foreign investor outflows from emerging markets.
“The rupee is reflecting the oil shock almost immediately,” said Aditi Nayar, Chief Economist at ICRA. “When crude spikes, oil marketing companies step up dollar purchases while foreign investors often reduce exposure to emerging markets.” Global crude prices have surged accordingly. Brent crude has climbed toward the $105-110 per barrel range, as traders price in the possibility that the conflict could disrupt Gulf oil flows. For India, the implications are significant. The country imports nearly 85 per cent of its crude requirements and consumes about five million barrels per day. Economists estimate that every $10 increase in oil prices raises India’s annual import bill by roughly $15-20 billion.
“If oil averages above $105 for even one quarter, India’s current account deficit could widen toward 3 per cent of GDP,” Nayar said. “That would put further structural pressure on the rupee.” Budget assumptions for the current fiscal were based on crude prices closer to $85-90 per barrel. If oil averages near $110, analysts estimate India’s import bill could swell by $25-30 billion above baseline projections.
The geopolitical shock is also rippling through global supply chains. Higher energy prices are pushing up shipping costs, while insurers are charging steep warrisk premiums for vessels transiting the Gulf. For a trading economy like India — dependent on maritime routes for both energy imports and merchandise exports — such disruptions could increase logistics costs and slow trade flows. Another emerging concern is inflation. Retail consumer inflation had been moderating toward the 4-5 per cent range, comfortably within the RBI’s 2-6 per cent tolerance band.
But sustained high crude prices could quickly reverse that trend. “Every $10 rise in oil can add roughly 30-40 basis points to headline inflation over time,” said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank.
A weaker rupee offers some support for export-oriented sectors such as IT services and pharmaceuticals, though analysts say the benefit may be limited.
Against this backdrop, attention is turning to the policy response from RBI. Economists expect the central bank to rely initially on foreign-exchange intervention to stabilise the rupee and prevent excessive volatility, while closely watching inflation trends before considering any shift in interest-rate policy.
Much, however, will depend on how the conflict unfolds. If the war spreads or shipping through the Strait of Hormuz is seriously disrupted, the oil shock could deepen —transforming a regional military confrontation into a full-blown global economic challenge.
Slippery history
India’s past encounters with global oil shocks show a clear transmission pattern into the domestic economy through the rupee, inflation and the current account deficit, often forcing policy action from the Reserve Bank of India.
During the 2008 commodity boom, when Brent crude surged to about $147 a barrel, the rupee weakened from around ₹40 to beyond ₹50. Energy costs drove wholesale inflation into double digits and widened the current account deficit. A similar pattern appeared in 2011-13, when oil stayed above $100, the rupee slid to about ₹68 and the CAD peaked near 4.8 per cent of GDP, prompting emergency tightening by the RBI. Conversely, the 2014-16 oil crash below $40 eased inflation and narrowed the CAD, allowing rate cuts.
Subsequent shocks — from the 2018 oil rebound to the 2022 Russia-Ukraine crisis —again showed how crude swings quickly affect the rupee, inflation and policy. The latest West Asia escalation now risks repeating the cycle, with oil strength pressuring the rupee and raising inflation and CAD concerns.