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Escalation of tensions in West Asia reintroduced heightened global geopolitical risk, triggering volatility across energy and global markets. A jump in Brent prices (to near $80bl) and associated weak risk uptake pushed up India’s VIX gauge, weakening the rupee past 91/ dollar, and led the benchmark equity indices to close more than 1% lower on Monday. Onshore markets are closed today, although signs of widening conflict in the Middle east region will continue to weigh on markets/ sentiments when trade resumes on Wed, given the country’s high dependency on imported energy (>80%), particularly crude oil. While India’s direct trade with Iran has diminished sharply over the past 5-6 years due to US sanctions, six out of the top ten suppliers of petroleum and crude oil to India are from the Middle east, accounting for more than half of the total supply. Besides crude oil, Qatar (largest supplier) and UAE are important sources of LNG supply for the country, with supplies likely to be impacted after Qatar shut down its largest plant yesterday. LNG is not as strategic to domestic consumption as oil for the time being making up less than a tenth of the energy mix, with dependency also material on fertiliser supplies.
Longevity and severity of the conflict will dictate the extent to which risk-appetite weakens, and high energy prices crimp demand. If hostilities end within a fortnight (as was the case in Jun25), markets will recover swiftly, albeit an escalation in the regional conflict or consequent blockade of the crucial Strait of Hormuz will carry wider macro ramifications. Our calculations show that every $10bl move in oil prices can raise the current account deficit by 0.35% of GDP, with the impact on inflation (20-30bp) contingent on the extent of pass through to the retail prices. India had undertaken measures to reform its fuel sector by deregulating petrol and diesel prices, allowing them to align with market rates to reduce fiscal deficits and losses of the upstream oil marketing companies. This helped to lower the fiscal burden on the government’s books, with total subsidies accounting to 1.2-1.3% of GDP, of which petroleum amounts to less than 3% of the total. However, in the event of a sharp rise in global fuel prices, authorities are likely to be cautious about fully passing on higher costs to consumers. The need to protect household purchasing power and support businesses as well as a packed state election calendar in 1H26 may prompt a more measured approach to retail fuel price adjustments. A second order impact will be on remittances and consequently on the current account math if hostilities drag on for a few months (we this as a remote possibility for now). We don’t expect the central bank to shift policy gears at this juncture, with an extended pause still at play. Separately, India’s rebased GDP series, out on late Friday, suggested a modest but meaningful firming in activity in FY26 (see PDF for detailed note). When markets resume trade on Wed, contingent of developments hereon, we expect INR to stay under pressure for a revisit of 92/USD, but attract a strong intervention hand. 
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Related insights
- Asset Allocation: Middle East Conflict Update03 Mar 2026
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Related insights
- Asset Allocation: Middle East Conflict Update03 Mar 2026
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