At a time when the world’s major central banks are choosing to hold interest rates, projecting caution in the face of geopolitical uncertainty, India finds itself confronting a far more complex reality. The conflict in West Asia once again exposed a persistent fault line in the global economic order: while advanced economies can afford to “wait and watch”, emerging economies must absorb the shock. Recent global evidence suggests that central banks are deliberately pausing amid the heightened uncertainty and volatile energy markets, reflecting the limits of monetary policy under geopolitical stress.

The crisis we just saw was not merely another episode of geopolitical instability. It represented a structural disruption with far-reaching economic consequences, particularly for countries like India that remain heavily dependent on external energy supplies. As tensions escalated and critical chokepoints such as the Strait of Hormuz faced disruptions, the global energy system came under visible strain. Oil markets, long recognised as central to global macroeconomic stability, are always highly sensitive to geopolitical risks, and energy shocks have been consistently identified as the major drivers of inflation and financial instability across the globe.

The effects of the Iran conflict rippled across sectors. Rising fuel prices began to transmit through the economy, increasing costs in agriculture, manufacturing, transport, and services. Energy is not merely an input; it is foundational to production and distribution. When its price rises, the consequences cascade across the value chain from farm inputs and industrial processes to logistics and final consumption. As recent developments indicated, shortages, supply bottlenecks, and even black-marketing tendencies began to emerge in places, underscoring the depth of the disruption.

The cascading impact highlights a critical limitation of monetary policy. Interest rate adjustments can moderate demand, but they cannot resolve supply disruptions rooted in geopolitical conflict. Theoretical and empirical literature has long established that oil price shocks generate stagflationary tendencies, where inflation rises even as growth weakens, thereby constraining policy effectiveness. The cautious stance adopted by global central banks reflects this constraint.

Yet, what appears as prudence at the global level translates into vulnerability at the national level for economies like India.

India’s exposure stems from its structural dependence on imported crude oil, which accounts for nearly 85-90 per cent of its consumption. Even moderate increases in global oil prices can widen the current account deficit, weaken the rupee, and intensify inflationary pressures. The experience of the Russia-Ukraine War demonstrated how quickly such external shocks can destabilise domestic macroeconomic conditions. The recent crisis carried similar risks, but within a more uncertain global environment.

Conditions for slowdown in economic growth

The macroeconomic implications extend beyond inflation. Rising energy costs increase production expenses, reduce profitability, and discourage investment. At the same time, higher prices erode household purchasing power, weakening demand. This simultaneous pressure on supply and demand creates the conditions for a slowdown in economic growth. Policymakers have already warned that the rising energy costs that came with the West Asia conflict could weaken India’s growth trajectory while fuelling inflationary pressures. Had the conflict persisted, output, employment, exports, and capital flows would all have been adversely affected.

The external sector presented an equally challenging scenario. Disruptions to shipping routes, higher insurance costs, and logistical uncertainties affected trade flows. Exports to the Gulf region, an important destination for Indian goods, dropped while rising import costs widened the trade deficit.

The resulting pressure on the rupee further amplified the imported inflation. Financial markets reacted sharply, with oil shocks pushing currency volatility and increasing stress in emerging market assets.

Capital flows are another dimension during such challenges. In periods of heightened global uncertainty, investors tend to move toward safer assets, reducing flows into emerging markets. Recent data indicate that foreign investors withdrew from Indian assets at a record pace amid the oil-driven uncertainty, which intensified the pressure on the rupee and financial markets. This can be of particular concern to India given the role of capital inflows in financing the current account deficit and sustaining investment.

For the RBI, the policy dilemma is acute during such times. Raising interest rates may help anchor inflation expectations and support the currency, but at the cost of slowing economic activity. Holding rates may support growth but risks allowing inflationary pressures to persist. The RBI maintained a cautious stance, balancing inflation risks against growth concerns, a trade-off that reflects the structural limitations of monetary policy in addressing externally driven shocks.

What distinguishes the Gulf crisis was its breadth. It was not confined to macroeconomic aggregates but became increasingly visible in everyday economic life. Reports of fuel and LPG shortages, rising transport costs, disruptions in travel, and stress among small businesses indicated that the impact was both widespread and uneven. The informal sector, in particular, remained highly vulnerable due to its limited capacity to absorb cost shocks.

The geopolitical context is a further complication for India. The evolving global order is strongly marked by shifting alliances and strategic competition, and this has implications for energy security, trade relations, and policy autonomy. Recent assessments suggest that India faces risks on multiple fronts at such times—from energy supply disruptions to trade and financial volatility—highlighting the interconnected nature of these challenges.

The broader lesson of the crisis came from its structural nature. Externally driven shocks whether arising from conflict, pandemics, or supply chain disruptions are becoming more frequent in an unstable global order. As noted in global macroeconomic assessments, inflation dynamics are increasingly shaped by geopolitical and supply-side factors, which challenge traditional policy frameworks.

A comprehensive approach

In such a world, reliance on a narrow set of policy tools is insufficient. A more comprehensive approach is required. Fiscal policy must play a more active role in cushioning vulnerable sectors and managing inflationary pressures. Energy policy must prioritise diversification and reduce dependence on imported fossil fuels. Investments in renewable energy, expansion of strategic reserves, and improvements in energy efficiency are critical to enhancing long-term resilience.

Equally important is the need to address structural inefficiencies within the economy. Reducing energy intensity, improving public transportation, and curbing wasteful consumption can mitigate vulnerability to energy shocks. Strengthening domestic demand can provide a buffer against external volatility, particularly when global trade conditions deteriorate.

For a growing economy like India, waiting is not a strategy. The risks posed by imported inflation, external imbalances, and growth constraints will always demand a proactive and multidimensional response. In a world where geopolitics increasingly shapes economic outcomes, resilience must be built into the foundations of the economy.

The Gulf crisis must not be seen as an aberration but as a signal. The real challenge for India lies in how best it begins to prepare now for a future where such disruptions are likely to become the norm.

Tajamul Rehman Sofi is an economics researcher specialising in financial stability, banking efficiency, jobless growth, and public policy analysis. The views expressed here are personal.

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