India entered the year with benign inflation and relatively strong economic momentum, but the outbreak of the Iran war and the effective disruption of shipments through the Strait of Hormuz have sharply altered that outlook. As the third-largest global oil importer and consumer - importing roughly 90% of its oil - India is particularly exposed to the shock of higher global energy prices and to related supply interruptions, including for fertiliser.
International trade through the Strait of Hormuz accounts for about one-fifth of global oil and gas transit, and the conflict has triggered a chain of effects that analysts say will raise costs for consumers, manufacturers and the government so long as the disruption continues.
Policy makers have moved quickly to blunt immediate currency and reserve pressures. The Reserve Bank of India (RBI) announced a package of measures on Friday intended to support the rupee and foreign exchange reserves. New Delhi has also employed fiscal and administrative tools - curbing gold imports, urging citizens to limit foreign travel, promoting public transport and reducing taxes on gasoline and gasoil - to restrain demand for foreign exchange and manage the shock.
These steps follow a steep jump in India’s oil-and-gas import bill, which rose 53% in April from March. The surge has led to forecasts of a sharply wider balance-of-payments (BoP) deficit. HSBC, which previously expected India’s BoP shortfall to swell to about $65 billion in 2026-27, now anticipates that the recent measures could improve the external balance by roughly $30 billion. By comparison, India recorded a BoP deficit of $25.2 billion, or 0.6% of GDP, in 2025-26.
Market and economic indicators reflect the changing backdrop. Benchmark international oil prices jumped after the conflict began on Feb. 28, approaching nearly $120 per barrel before easing; despite the pullback, oil prices remain about 30% higher overall and gas prices about 75% above pre-conflict levels. In response, the RBI now sees consumer price inflation averaging 5.1% in the financial year to the end of March 2027, compared with a 3.48% reading in April, and projects economic growth slipping to 6.6% from 7.7% in the previous year.
Interest-rate markets are registering the elevated risks. Although the RBI left rates unchanged recently, interest rate swap markets are pricing in at least 25 basis points of hikes over the next three months and more than 75 basis points over the coming year.
Analysts highlight overlapping supply issues beyond oil that amplify the macroeconomic hit. Michael Langham, an emerging markets economist at Aberdeen Investments, warned "India is set for a series of supply shocks." He added that the country faces not only pressure on oil prices but also potential disruptions to fertiliser supplies - a development that could affect key crops such as wheat at a time when farmers are bracing for the El Nino weather phenomenon, which often brings drought conditions.
Those supply-side strains, Langham said, "will all drag on India’s growth outlook, yet the ability of the RBI to look through the energy price shock from the Strait of Hormuz will be increasingly difficult given the overlapping nature of these supply shocks."
Portfolio manager Sat Duhra of Janus Henderson Investors stressed the structural complications that predate the conflict: "India continues to face deeper structural challenges which has weighed on foreign direct investment, employment, manufacturing expansion, consumption, and nominal GDP growth." He warned that the energy shock will further undermine growth and put additional pressure on government finances, and that any attempt to trim public-sector capital expenditure to stabilise conditions would risk further slowing the economy. "This leaves policymakers in a difficult position," he added.
Domestic fuel pricing has been another flashpoint. Retail petrol and diesel prices have been raised more slowly in India than in several other Asian oil-importing countries. Since the jump in import costs, petrol and diesel have increased by less than 10% in India, compared with rises of 50% or more elsewhere in the region. While retail fuel prices are formally deregulated, the government exerts significant influence because it remains the majority shareholder in the principal fuel retailers.
The government has stated it will not compensate fuel retailers for losses, a stance that analysts say will carry fiscal consequences - for instance through lower dividend flows from state-owned fuel companies - and reduce the government's financial flexibility to address the crisis.
Other fiscal costs are already emerging. A government official indicated that the fertiliser subsidy is likely to increase by about 20% in 2026/27. The government has also cut taxes on gasoline and gasoil, forgoing roughly 140 billion rupees in monthly revenues. New Delhi has set a fiscal deficit target of 4.3% of GDP for the current financial year, but a Reuters poll forecast put the deficit at 4.7%, and some economists see it rising as high as 5%.
Credit ratings firm Crisil expects additional modest increases in retail oil prices, noting the broader knock-on effects for the economy. "The broader effect will reverberate across the economy through higher-transport costs, pushing up both food and core inflation," Crisil said in a report.
Officials and analysts alike face a set of constrained choices. The combination of higher import costs, rising inflation expectations and possible fiscal slippage complicates both monetary policy and fiscal planning. Measures announced to stabilise the external position may limit immediate currency damage - HSBC suggested the steps announced on Friday could improve India's BoP position by about $30 billion relative to its earlier forecast - but the longer-run drag on growth, inflation and public finances is likely to persist so long as energy prices and supply disruptions remain elevated.
What this means for markets and sectors
- Energy and transport sectors will see immediate cost pressures from higher oil and gas prices, feeding through to higher operating and logistics expenses.
- Agriculture could come under strain if fertiliser disruption combines with adverse weather from El Nino, with potential implications for food prices and rural incomes.
- Government finances face a squeeze from larger subsidies and foregone tax revenues, potentially reducing fiscal space for capital spending or other priorities.
This article presents the current state of the Indian economy and public finances in light of supply disruptions tied to the Iran war and related rises in global energy and fertiliser costs.