On February 28, the US and Israel launched an alarming attack on Iran, which has quickly intensified into a volley of strikes and counter-strikes enveloping countries with substantial US assets such as United Arab Emirates, Qatar, Bahrain and Jordan. Iran’s Supreme Leader since 1989, Ayatollah Ali Khamenei has been killed in the attack, intensifying the sense of geopolitical uncertainty. It is hard to say how long this war will carry on or what destructive turn it takes, especially if it drags in China and Russia in some form to support Iran. But it will surely disrupt the oil and global trade in general, with possible knock- on effects on capital and currency flows. India, which gets almost half its oil supplies through the Straits of Hormuz (about 2.6 million barrels per day), faces the risk of both supply and price shocks, especially because it cannot possibly fall back on Russian oil. Over $40 billion of its exports are routed through this region as well.
In the worst case scenario, we could see plummeting markets, a pull-out of capital from emerging economies, spike in crude oil prices from $75 a barrel (by $5-$20, according to analysts) and an increase in shipping and insurance costs. As for the potential impact on India, a Reserve Bank of India study (2025) has estimated that a 10 per cent rise in global crude prices could raise headline inflation by 20 basis points. Even if pump prices are kept in check, higher input costs would raise wholesale prices and core inflation. Apart from fuel and commodity-induced price increases, the currency too could come under stress. Exporters, already coping with tariff turmoil and an uncertain business environment, may have to contend with further disruption, both in terms of logistics costs and global demand. This could widen the trade deficit.
In a dire scenario of an extended war with Iran’s attacks on the Gulf states intensifying, remittances could suffer if expatriate Indian workers there choose to return. According to a March 2025 RBI paper on India’s remittance economy, the diaspora in Gulf Cooperation Council countries, at about 9 million, accounts for half its total global diaspora. Over 40 per cent of the trade deficit is financed by $120 billion remittance flows. And, about 40 per cent of these flows are from the GCC countries. Meanwhile, capital flows have been unreliable on account of US-induced disorder. The RBI will have to keep a tab on the external account in these trying times, notwithstanding the fact that forex reserves are at comfortable levels.
These are but scenarios to be considered, and it may not turn out be that bad, after all. The Centre and RBI will have to keep a tab on inflation, and be alert to the developing situation. With strategic petroleum reserves and fuel stocks with oil companies enough to meet at least a month’s demand, there is no cause for anxiety. India is food-secure. Yet, caution should be the watchword.
Published on March 1, 2026