The Iran-Israel conflict is becoming increasingly intractable with each passing day and poses significant challenges for the Indian economy, which has so far shown considerable resilience amidst a barrage of geopolitical disruptions over the past three years.

The current flare-up comes at a time when the Indian economy has posted 7.4% growth in Q4 of FY25, inflation is benign at a six-year low of 2.82% in May, and the Reserve Bank of India (RBI) has eased monetary policy with a one-percentage-point reduction in the repo rate to support economic growth.

Any threat to energy security in the wake of the ongoing Iran-Israel conflict may undermine the hard-won macroeconomic stability India has achieved through significant government efforts, such as sustained capital expenditure. In fact, the impact of the Iran-Israel conflict on the Indian economy may be multifaceted, affecting trade and various other sectors.

These following three areas are crucial:

Oil Prices Spiral

Brent crude prices have surged by over 12% to nearly $78 per barrel in the wake of the escalation. JPMorgan has projected that Brent crude could reach $120 per barrel in a worst-case scenario.

It is worth noting that a $10-per-barrel increase in crude oil prices could raise India’s oil import bill by $12–13 billion annually and widen the current account deficit (CAD) by approximately 0.3% of GDP, leading to depreciation of the rupee, which has already fallen to ₹86 per US dollar.

Higher oil prices will stoke inflation, and sectors that use crude oil as a key input—such as paints, tyres, cement, and chemicals—will face pressure on margins and profitability. A saving grace may be India’s recent shift toward discounted Russian oil imports.

The Strait of Hormuz

Another major concern is Iran potentially blocking the Strait of Hormuz—a critical chokepoint through which the majority of India’s crude oil imports pass. The strait has emerged as a flashpoint in the conflict.

Iran has previously blocked the Strait during times of tension. Any disruption could severely curtail oil supplies, driving up global crude prices.

The Global Trade Research Initiative (GTRI) has warned that the Strait of Hormuz is especially vulnerable, given that the narrow waterway is wholly under Iran's control.

Should the conflict intensify and the United States become more directly involved—a possibility that appears likely as former President Donald Trump has cut short his G7 visit and called for “evacuating Tehran”—Iran may resort to blocking the passage altogether.

The Strait of Hormuz is one of the world’s most strategically vital maritime chokepoints. Located between the Persian Gulf and the Gulf of Oman, it serves as the sole sea route for over one-fifth of global oil trade.

Every day, around 20 million barrels of oil pass through the Strait, making it critical for major importers such as India, China, Japan, and several European nations. Its narrowest width—just 21 miles—makes it particularly vulnerable to military or geopolitical disruptions.

Trade Route Disruptions

The Iran-Israel conflict is also affecting India’s trade routes, particularly via the Red Sea and the Suez Canal. These routes account for an estimated $400 billion in annual trade with Europe, the United States, Africa, and West Asia. Iran-backed Houthi groups have been disrupting the Red Sea since the Israel-Hamas conflict began in 2023.

As a result, Indian exporters have been forced to reroute vessels around the Cape of Good Hope, adding 4,000–6,000 nautical miles and 2–3 weeks to transit times. This has led to a 15–20% increase in shipping costs, squeezing margins for exporters. Sectors such as textiles, garments, and engineering goods have been particularly impacted.