India’s battle against inflation has seen progress in recent months, but the gains are fragile. The eruption of new geopolitical conflicts, particularly involving key oil-producing nations, has injected a high level of uncertainty into global markets. While India’s direct trade with Iran and Israel is minimal, its reliance on imported commodities, especially crude oil, makes it highly susceptible to global price swings.
R. Suryamurthy
India’s wholesale inflation rate dropped to a 14-month low of 0.39% in May 2025, signaling a temporary period of price stability. However, this phase of disinflation could prove short-lived. Rising geopolitical tensions, especially the escalating Israel-Iran conflict, are beginning to disrupt global commodity markets. Economists warn that such instability, particularly in the oil sector, could have adverse ripple effects on India’s economy, including rising inflation, increased import costs, and pressure on growth.
The Reserve Bank of India (RBI) and research institutions such as QuantEco Research have raised concerns about the impact of a potential oil price shock. Brent crude has already surged over 15% in June, reaching around USD 75 per barrel, the highest since the onset of the Russia-Ukraine conflict. Given India’s reliance on imported oil, this trend is worrying. A continued climb in prices, especially beyond the USD 80 per barrel threshold, could jeopardize macroeconomic stability.
1. Oil at the Centre: The Strait of Hormuz and India’s Economic Vulnerability
While Iran’s oil production remains constrained by international sanctions, its geopolitical importance stems from its control over the Strait of Hormuz, a critical maritime chokepoint through which nearly 27% of global seaborne oil passes. Any military escalation that threatens this route could push global oil prices closer to USD 100 per barrel.
QuantEco Research notes that the “durability of the shock” would determine how significantly it affects India. Higher oil prices not only inflate India’s import bill but also contribute to domestic inflation, especially through costlier transportation and manufacturing inputs. The RBI estimates that a 10% rise in oil prices could raise CPI inflation by 30 basis points and reduce GDP growth by 15 basis points. This scenario would also aggravate India’s fiscal and current account deficits, weakening investor confidence.
India, one of the world’s largest oil importers, is thus particularly vulnerable to any disruptions in oil supply or price spikes. Although May’s low inflation offered a brief reprieve, the oil markets remain a critical external risk factor that can quickly derail domestic economic progress.
2. Beyond Oil: Broader Market Volatility and Commodities in Flux
The fallout from the Israel-Iran conflict extends beyond crude oil. Industrial metals are experiencing downward price pressure due to global economic uncertainty and trade friction. Rajani Sinha, Chief Economist at CARE Ratings, highlights that new U.S. tariffs on steel and aluminium have compounded concerns of a supply glut, especially as China continues to flood the market. These dynamics may suppress prices temporarily, easing input costs for some industries. However, if the geopolitical situation worsens or economic growth slows, India could face reduced export demand and greater trade imbalances.
On the flip side, precious metals like gold are surging. Gold prices have increased by nearly 5% in June, reaching approximately USD 3,450 per ounce, as investors seek safe-haven assets. This trend reflects heightened global risk aversion and financial market anxiety. Such volatility can also affect India’s foreign investment flows, foreign exchange reserves, and consumer sentiment.
Even with limited direct trade exposure to Iran and Israel—just 0.3% and 0.5% of merchandise exports, respectively—India remains vulnerable to indirect shocks. Petroleum products and gems & jewellery, which made up 38% of India’s imports in FY25, are highly sensitive to global price movements. These imports also influence CPI inflation, as rising input costs can trickle down to consumers quickly.
3. Fragile Calm: Policy Window Narrow Amid Growing Global Uncertainty
Economists advise cautious optimism as India navigates these uncertain waters. Sankar Chakraborti, MD & CEO of Acuité Ratings, notes that while the disinflationary trend is welcome, volatile global conditions and unpredictable weather patterns (such as El Niño) could upend inflation control efforts. Food inflation, already vulnerable to weather swings, could compound oil-related price pressures.
Rajani Sinha underscores the importance of monitoring not only the Middle East conflict but also broader trade dynamics, as rising protectionism and geopolitical tensions could affect supply chains and costs. For instance, ongoing tariff escalations between major economies could reduce global trade efficiency, making imports more expensive for countries like India.
For now, analysts believe that as long as Brent crude stays below USD 80 per barrel on average, India can manage the fallout without severe macroeconomic repercussions. FY25’s average stood at USD 79 per barrel, giving a slim margin of comfort. But if prices rise sharply and remain elevated, India may need to recalibrate both monetary and fiscal policy to maintain stability.
The current cooling of inflation provides a critical policy window for India to strengthen buffers—be it through foreign exchange reserves, fiscal prudence, or inflation-targeted monetary policy. However, the external threat landscape remains dynamic. The situation in the Middle East could escalate quickly, and the global commodity market reaction may leave India little time to adjust.
India’s battle against inflation has seen progress in recent months, but the gains are fragile. The eruption of new geopolitical conflicts, particularly involving key oil-producing nations, has injected a high level of uncertainty into global markets. While India’s direct trade with Iran and Israel is minimal, its reliance on imported commodities, especially crude oil, makes it highly susceptible to global price swings.
With inflation under control for now, policymakers must remain agile, ready to respond to sudden shocks. Strategic preparedness, fiscal discipline, and a watchful eye on global developments will be key to navigating what could very well be the calm before a financial storm.
