The global macroeconomic landscape faces a severe shock following the late-Feb-26 military intervention by U.S. and Israeli forces against Iran, which resulted in the death of its supreme leader Ayatollah Ali Khamenei. This event has triggered a cascade of retaliatory measures by Iran, culminating in a de-facto maritime embargo at the Strait of Hormuz, a vital logistical chokepoint responsible for handling ~20% of global petroleum liquids and a substantial fraction of liquefied natural gas (LNG). 

From India's standpoint, the exposure to the Strait of Hormuz is of paramount importance despite reduction in the oil intensity[1] over the past decade. India remains dependent on imports for ~85% of its crude oil requirements with ~50% of these volumes navigating the now-blockaded Strait of Hormuz. 

While the intensity of the supply shock is on active radar, the broader macroeconomic fallout from this ongoing regional crisis will hinge critically on its duration - something that will determine the second order spillover impact. Assuming that crude prices up to USD 80 pb remain absorbable without major disruptions, we outline below the following statistical scenarios that broadly emerge in the Indian context:

*Note: FY27 (Post War) figures are merely statistical scenarios. Oil price assumption represents the average for FY27. The impact on WPI inflation will be higher than that shown for CPI inflation.

The immediate transmission of this conflict to the global economy has been via a strong upward adjustment in prices of energy commodities. Brent crude, which had been trading around a relatively comfortable USD 70 pb pre-conflict, spiked past USD 100 pb mark, briefly touching a three-year high of USD 119.5 pb on 9^th Mar-26, before moderating to ~USD 88 pb as of 10^th Mar-26. With prices already up 23.4% since the war began, the market now appears to be recalibrating to a higher baseline. Meanwhile, structural constraints are amplifying the crisis, with neighbouring producers like Iraq and Kuwait forced to curtail output due to exhausted onshore storage capacities. 

Consequently, the macroeconomic ramifications of the energy price shock for India could be multi-channelled: 

• The inelastic demand for energy imports coupled with a sustained surge in global crude prices could bloat India's oil import bill which had contracted by 3.9% on an FYTD basis (till Jan-26) owing to subdued oil price pressures. Further, exports to UAE and Saudi Arabia which alone accounted for 11.1% of India’s total exports in CY25, remain exposed to regional spillovers. 
• India’s external sector stability is structurally anchored by robust inward remittances, which scaled USD 135.4 bn in FY25. With the Gulf Cooperation Council (GCC) accounting for ~38% of these inflows, a protracted West Asian conflict could pose a medium-term risk to this critical BOP buffer.
• Compounding the external imbalance, an aggressive capital flight (with FIIs offloading over ~USD 1.3 bn in equities in early Mar-26), has precipitated an aggressive depreciation of the INR. The rupee, already down 6.3% FYTD (till Feb-26) slid past the 92/USD mark by Mar-9 2026, thereby weakening 1.2% since the war’s onset. 
• As per RBI estimates, a 10% crude oil price rise translates into +30 bps CPI inflation, and a 15 bps drag on GDP growth. However, these baseline estimates, calibrated on the prior inflation series likely understate current sensitivities, given the combined weight of petrol and diesel items, double from 2.3% to 4.8% under the revised CPI basket. While OMCs typically buffer initial shocks on their balance sheets, a prolonged Middle East crisis could necessitate retail price hikes, amplifying the pass-through.
• Meanwhile, the global LNG market is currently witnessing prices to clock a three-year peak following the suspension of operations by QatarEnergy, the world's preeminent LNG producer. This has driven average price hikes in India of ~8% for commercial cylinders and ~6.9% for domestic ones since Feb-26. 
• Aligned with the government’s expenditure rationalisation strategy, the FY27 fertilizer subsidy is budgeted to fall 8.4%. Yet recent INR depreciation and surges in global LNG and ammonia prices threaten to inflate the subsidy bill, straining fiscal targets already nudged higher at 4.5% (FY26) and 4.46% (FY27 assuming a 10% YoY FY26 nominal GDP) owing to a compression in nominal FY26 GDP. Sensitivity analysis over FY16-FY27 further reveals that a 0.1 pp rise in the fertilizer subsidy-to-GDP is associated with ~1.6 pp higher annualized WPI fertilizer inflation, underscoring the policy trade-off between fiscal discipline and price stability.

Outlook

Despite the challenges from this supply shock to its ‘goldilocks’ macro-outlook, India sits at a position of structural strength. With foreign exchange reserves peaking at a record USD 711.5 bn (+5% FYTD) as of Jan-26, and a highly manageable Current Account Deficit (~1% in FY26 so far), the country's macroeconomic aggregates possess shock-absorption capacity. 

A central pillar of this economic resilience is the deliberate and strategic recalibration of India's energy supply chains. A diversified crude sourcing from over 40 nations and a crucial 30-day US waiver to purchase Russian crude, are immediate tactical buffers to bypass the Gulf supply constraints. In parallel, the ambitious India-US LNG deal establishes as a second anchor of energy security, even as limiting energy price pass-through to households while safeguarding the fiscal consolidation glide path remain India's key macroeconomic policy challenges through FY27.

Our baseline FY27 economic projections for India will hold if there is an immediate ceasefire/resolution of the ongoing geopolitical tensions within this month. Any further escalation or prolongation of the crisis could warrant a reassessment of our forecasts, with the scenarios highlighted earlier indicating the potential direction of likely revisions. 

Chart 1: Brent Crude Prices and USD/INR Exchange Rate