India managed quite well to overcome the first shock caused by the West Asia conflict. However, the conflict is escalating again —marked by severe blockades in the Strait of Hormuz – posing a major downside risk to India’s macroeconomic stability, primarily through energy price shocks, trade disruptions, and fiscal strain. Despite these external shocks, the Reserve Bank of India (RBI) and government updates indicate that India’s economic fundamentals remain cautious but resilient, supported by a strong 7.7% GDP growth in FY26 and robust foreign exchange reserves.
The energy shock and consequent imported inflation will cause crude vulnerability, as India relies on imports for nearly 88% to 90% of its crude oil requirements. According to experts, prices peaked near $120 per barrel in March 2026 before cooling to around $95. Every $10 rise in Brent crude widens India’s Current Account Deficit (CAD) by 0.3% of GDP. Further impact will be on retail inflation – the RBI has revised its FY27 CPI inflation projection upward to 5.1% (from 4.6%). It has held the benchmark repo rate unchanged at 5.25% to balance growth with price stability.
There will be an impact on subsidies and consequent fiscal strain. To insulate local consumers, the government cut additional excise duty on petrol and diesel by Rs 10 per litre. Consequently, Oil Marketing Companies (OMCs) faced massive under-recoveries, requiring a Rs 1.23 lakh crore government relief package. West Asia accounts for 40% of India’s Urea and NPK fertiliser imports. Blockades have driven up global fertiliser and LNG costs, heavily inflating the government’s agricultural subsidy bill.
Trade and Balance of Payments are witnessing a widening Current Account Deficit, which is expected to expand significantly to 2.2% of GDP in FY27 due to inflated energy and fertilizer bills. Geopolitical risk triggered capital outflows, with Foreign Portfolio Investors (FPIs) pulling out $23.6 billion. This pushed the Indian Rupee to record lows per US Dollar. The Gulf region accounts for roughly 38% of India’s total inward remittances, which face potential slowdowns if regional workplaces encounter direct disruption.
India’s Strategic Countermeasures will involve supply diversification: refiners have mitigated shortages by expanding their import baskets across 41 source countries, anchoring heavily on Russian crude and utilising the UAE’s Fujairah terminal to bypass dangerous chokepoints. India is leveraging its $697 billion forex reserves (covering ~10.7 months of imports) to defend the rupee from extreme volatility. The crisis has accelerated the cabinet pipeline for Phase-II strategic oil reserves valued at Rs 14,527 crore under a public-private partnership (PPP) model to expand domestic storage autonomy.
As such, India has been forced to diversify, which in the long run will only benefit an economy that, perhaps, has required such a challenge to expand beyond conventional boundaries.
