The ongoing conflict between US and Iran is not mere a regional geopolitical tension rather a macro- economic threat for all the oil- import dependent economies present in the region. Indian economy is not an exception to this because it imports 85% of its crude oil requirements making it highly sensitive to global oil price shocks. US latest strikes on Iran and killing of its supreme leaderAli Khameneiand Iran’s retaliation on the air bases of Bahrain, Kuwait, Qatar and United Arab Emirates where US assets are hosted has escalated the tensions in the region. Although the conflict between these two countries is not a latest development but the result of ongoing tussle since 1950s when US intelligence agency CIA uprooted the democratically elected Prime Minister Mohammed Mossadegh and transferred the power to a pro- western monarch Mohammad Raza Pehalvi. This incident created a deep resentment amongst Iranians towards America. The next breakthrough came in 1979, when Iran’s Islamic Revolution once again toppled over the Pehalvi’s rule and established Islamic Republic under Ayatollah Khomeini which widened the craters between Iran and America on ideological grounds. Later in 1979, Students of Iran stormed into US Embassy in Tehran and made 52 diplomats as hostage for 444 days, because of which, US imposed serious economic sanctions and permanently cut their diplomatic ties with Iran. In subsequent years US kept on increasing sanctions to supress the Iran’s growing influence in Middle East and its nuclear program which it feared could lead to nuclear weapons. Amidst several talks on various international platforms during these years, US finally withdrew from Iran’s nuclear deal and re-imposed sanctions in 2018 and killed their commander of Iranian Revolutionary Guard Corps (IRGC) Qasem Soleimani in 2020 and recently their supreme leader on Feb 26, 2026. Since then fog of war are hovering in the skies of the region where continuous strikes and counter strikes are taking place and making the entire region highly volatile. India, is at receiving end of the consequences of this war because it is one of the largest importer of crude oil in this region and if the war prolongs it may lead to serious repercussions for Indian economy.
First and foremost is the disruption of Oil supply. In the economic and oil market discussions, West Asia usually referred to as major energy producing nations like Saudi Arabia, Iran, Iraq, The UAE, Kuwait and Qatar especially because of their global oil and gas exports and the importance of Strait of Hormuz. The Strait of Hormuz is a narrow water way between Iran and Oman which acts as a connecting juncture between the Gulf and Arabian Sea. Almost one fifth of the global oil demand pass through this route every day. On top of it, more than 40% of India’s crude oil imports transit through this route. Iran has reportedly warned ships against passing through the strait and more than 200 vessels have dropped anchors outside the strait. As a consequence to which, Brent crude briefly rose above $82 per barrel, its highest level since January 2025, while US West Texas Intermediate climbed above $75 per barrel, the highest since June. If this situation continues, it will disrupt the energy supply in local market due to which prices of energy supplies in domestic market will increase and eventually Consumer Price Index (CPI) will rise.
Secondly the Indian Rupee may face a down surge because, if sustained over a longer period of time, this geo political tension may lead to macro economic disturbances in Indian economy which may trigger capital flight from India to safer economies hence Indian rupee will depreciate against global currencies. Our import bills will become costlier and prices of raw material will increase. This will further fuel up the head line inflation in economy.
Thirdly, India not only imports crude oil but other commodities like edible oils, fertilizers etc. which are tied to the global supply chain having a transit point in the middle east. If this route remains disrupted due to conflict, rerouting may increase freight cost. Althogh the impact is expected to be limited because of the altrrnate ports on the nodes of India- Middle East- Europe Corridor like Fuzairah Port in UAE on the Gulf of Oman and Salalah port in Oman.
The conflict will also impact the insurance cost in maritime logistics as well because insurers charge additional war- risk premium for the ships transiting from Gulf region which may reach upto 3% of the ship’s value. Freight rates for oil tankers have surged to record highs, reportedly up to $400,000 per day in the case of Very Large Crude Carriers or VLCCs transporting crude from the Middle East to China due to route disruptions and elevated risk. LNG tanker rates have surged more than 40 per cent, with some routes reaching $41,000–$61,500 per day according to reports. Shipping companies have introduced emergency conflict surcharges of up to $4,000 per container to offset added risks and expenses.
The escalated tensions between Iran and United States is not just a geopolitical confrontation but carry a deep impact on economies across the world and India will not be an exception to this. Increased freight costs, insurance costs, re routing of ships and increase in fuel costs will directly and indirecly fuel up inflation in Indian economy and thus will lead to increased burden on government exchquer and ultimately on the financial health of Indian consumers and industries.
