Oil Price Hike and Strait of Hormuz Tensions Pose Fresh Threat to India's Economic Stability: Union Bank Report
India's Economy at Risk: West Asia Conflict and Disruptions in the Strait of Hormuz
India's economy is facing significant risks due to the ongoing West Asia conflict and disruptions in the Strait of Hormuz. According to a report by the Union Bank of India, high crude prices are likely to hurt inflation, the rupee, and the current account.
The report, titled "From Hormuz to the Rupee: War, Oil and the Global Repricing of Risk," highlights the impact of the conflict on global and domestic macros and markets. The Strait of Hormuz remains "still functionally shut" and Brent trading above $100/bbl. This backdrop does not bode well for global or domestic markets.
Higher oil prices pose a significant risk to India's economy, as the country imports nearly 85% of its crude requirement. The report warns that higher oil keeps inflation risk alive, delays central-bank easing, pressures current accounts, tightens financial conditions, and weighs on risk assets, especially in energy-importing economies.
The impact of the conflict is already visible in India. As the escalation of the Iran-Israel conflict disrupted flows through the Strait of Hormuz, pushing Brent crude oil above $100/bbl, this translated into a visible "energy tax." The rupee slid to record lows near 95, and equities corrected on CAD and imported inflation concerns.
The rupee has exhibited a modest depreciation bias due to strong global dollar momentum, intermittent capital outflows, and elevated geopolitical uncertainties. However, the Reserve Bank of India has taken steps to stabilise markets. The RBI's Monetary Policy Committee maintained the policy repo rate unchanged at 5.25%, while reiterating the neutral stance, and remains prepared to respond to excessive volatility.
On trade, India's merchandise trade deficit narrowed to $20.7 billion in March 2026, helped by lower bullion and energy imports. However, risks remain elevated. The report warns that if disruptions continue, Brent is likely to hold in the $100-110 range, risking fuel price pass-through and CPI drifting above 4%. Every $10/bbl move in oil price can significantly widen the current account deficit and push inflation higher.
Looking ahead, the report suggests that the INR is likely to trade with a mild depreciation bias due to elevated Brent crude oil prices, evolving geopolitical risks, and a firm United States dollar. This offset relatively stable domestic fundamentals.
Read also: NTPC Targets Rs 25,000 Crore Nuclear Power Project in Bihar's Banka
Comparison of India's Merchandise Trade Deficit
| Month | Merchandise Trade Deficit |
|---|---|
| March 2026 | $20.7 billion |
| Previous Month | $22.3 billion |
| Change | ($1.6 billion) |
Note: The change in merchandise trade deficit is a decrease of $1.6 billion from the previous month.
Investor Takeaway
Investors should be cautious of potential market volatility due to rising oil prices and geopolitical tensions.
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