Hormuz Strait threat explained: Can India keep running if oil stops flowing? 

Oil is one of the most important resources. But since India does not produce enough oil, it imports to meet its needs. So, any event that disrupts the shipping routes can adversely affect India.

To manage this risk, India has created Strategic Petroleum Reserves, or SPRs. These are large underground storage units that store crude oil, which can be used during emergencies.

Currently, India’s SPRs have a total capacity of 5.33 million metric tonnes (MMT), spread across three main sites: Visakhapatnam (1.33 MMT), Mangaluru (1.5 MMT), and Padur (2.5 MMT). “India currently consumes around 5 million barrels of oil per day. So, this reserve is enough to meet about 9 to 10 days of crude demand if there are no imports. Of course, commercial stocks with oil marketing companies (OMCs) can extend this buffer further, up to around 74 days when combined. But if imports stop completely, we cannot run the country for long,” explains Sumit Pokharna, vice president-fundamental research, Kotak Securities.

The government has approved the construction of two more SPR sites: one at Chandikhol (4 MMT) and an additional facility at Padur (2.5 MMT). Once operational, India’s SPR capacity will rise to around 11.83 MMT, covering about 22 days of crude demand.

“Officially, India holds about 2-3 weeks of strategic petroleum reserves, which amounts to around 10-12 MMT. That is not a lot, and it clearly shows that India is not immune to serious supply disruptions,” says Vikas Gupta, smallcase Manager and CEO & Chief Investment Strategist at OmniScience Capital.

Multiple safeguards

India follows two major strategies to protect itself from supply disruptions: diversification and financial hedging.

India imports oil from many countries, not just from the Middle East. A big share of recent imports has come from Russia, even after the Ukraine conflict began. “A key positive is that India has diversified its import sources. We now import nearly half of our oil from Russia, and the supply from Russia continues even when geopolitical conditions are tense. Besides Russia, we also source crude oil from the U.S., Iraq, Saudi Arabia, and other countries. These supply lines can continue even if there is a disruption in the Strait of Hormuz. This protects us from total breakdown,” Gupta explains. 

India’s import volumes from non-Middle East countries are expected to increase in the case of a supply disruption in the current scenario. “As for financial protection, hedging through futures and options is a short-term strategy used by importers to lock in prices. But from a long-term sustainability point of view, physical supply diversification matters more than hedging,” he adds.

Growing fears

About 20% of global oil flows through the Strait of Hormuz, the narrow water passage that is one of the most important oil routes in the world. If the Strait gets blocked, even for a few days, oil prices could shoot up dramatically, with repercussions not only in India but across the world. 

Bank of Baroda chief economist, Madan Sabnavis, says it may be time to accept that oil prices are likely to go up. “If we assume that crude oil prices increase by 10% due to the tensions in the Middle East and the possible closure of the Strait of Hormuz, we are looking at a clear increase in India’s oil import bill,” he says. 

“Today, about 25% of our imports in FY25 are crude oil and related products. So, even with a strong services trade balance, we could see the trade deficit widen by about $12 billion. That would result in a small dip in GDP of around 0.25 to 0.3%, under current conditions. This is not a panic-level situation, but something to watch closely.”

Inflation threat

If oil becomes expensive, it can lead to a ripple effect. “Wholesale inflation will rise first, especially because many sectors use crude oil or its products like naphtha and aviation turbine fuel (ATF). We could see a direct 1% increase in WPI and an additional 0.5% from indirect effects,” Sabnavis says.

As for consumer price inflation (CPI), fuel has a smaller weight—about 2.4%. “So, unless retail fuel prices go up sharply, the CPI impact may be limited. The real question is: will the government allow petrol and diesel prices to go up?” he adds.

In recent years, the government and OMCs have held prices steady even when global oil became expensive. So, consumers didn’t feel the full impact. “If global crude oil prices remain above $100 for a sustained period, the Indian government may have to cut excise duty to protect consumers. But every ₹1 reduction in excise duty means ₹15,000 crore of lost revenue. That’s a hard decision. If a ₹5/litre cut is made, that’s ₹75,000 crore gone. The government will have to balance this with its budget plans,” he explains.

If tensions continue, the cost of shipping oil can rise. This includes higher freight charges and insurance premiums. So even if oil itself doesn't get more expensive, the final cost for India might go up anyway.

How India controls prices

India follows a dynamic pricing model for retail fuels like petrol and diesel. It adjusts fuel prices daily based on global crude oil and exchange rates. But in practice, the government has often chosen to absorb the shock during sharp price jumps.

“India’s pricing system is designed to absorb sudden shocks, though not fully. During the recent rise to $80 per barrel, there was some upward revision in retail fuel prices, but it was controlled. Government policy—mainly through excise and VAT adjustments—helped cushion the blow. Subsidies for LPG and kerosene have also been maintained, which helps vulnerable groups. The market sees this as mitigation, not complete protection,” says Ram Medury, founder and CEO of Maxiom Wealth.

Why oil prices may not stay high

While prices are rising, there’s also uncertainty. WTI crude oil jumped to a five-month high of $78.40 per barrel after the U.S. strikes on Iran’s nuclear sites at Fordow, Natanz, and Isfahan. On Sunday, Iran’s parliament voted to close the Strait of Hormuz. “But the vote still needs approval from the Supreme National Security Council and the Supreme Leader, so nothing has changed yet. Besides, blocking the Strait would hurt Iran itself, since more than half of its oil exports pass through the same route. So, markets are being cautious. That’s why crude has now fallen back to below $75 per barrel. It’s a wait-and-watch situation,” explains Kaynat Chainwala, AVP–commodity research at Kotak Securities. 

Who’s more exposed?

India is vulnerable, but not the most vulnerable. Other Asian countries rely even more on oil flowing through the Strait of Hormuz. “India imports around 2 million barrels per day through the Strait of Hormuz. Countries like Japan and South Korea are more exposed. South Korea, for example, gets over 70% of its crude oil from the Middle East. A sudden disruption would hit their currency, current account, and industrial output hard,” says Medury.

China is in a different league—it imports 5.4 million barrels per day through the Strait, almost 45% of its total crude oil imports. “Even though China buys a lot of oil from Russia and Saudi Arabia, it still cannot completely avoid the Strait,” he adds. “If the Strait of Hormuz is truly closed, it would affect nearly every Asian country. But India has at least taken important steps to reduce the pain. Other nations have not.”

The Andaman hope

India recently found signs of large oil reserves in the Andaman Sea. If these reserves turn productive, they could help India reduce import dependence. “It will change the game. It would support India’s diversification and help bring down import bills. But oil production takes time. Until that happens, current hedging strategies—diversification, strategic reserves, and financial instruments—remain critical,” Medury says.

India has come a long way by building oil reserves, importing from different countries, and controlling price shocks. But the country still depends heavily on outside sources. If oil prices rise for a short time, India can manage. But if global crude stays above $100 for many months, it could slow the economy and increase inflation.

As Madan Sabnavis puts it, “The Indian economy is strong and has been built with good foundations. A 10% rise in oil prices may not hurt GDP too much. But if prices remain high over time, it will become harder to manage. Then we may need to take tough calls on taxes, spending, and pricing.”