The escalating Israel-Iran conflict has sent shockwaves through global markets, with India feeling the brunt of surging crude oil prices. On June 13,
The escalating Israel-Iran conflict has sent shockwaves through global markets, with India feeling the brunt of surging crude oil prices. On June 13, 2025, Brent crude spiked to $78 per barrel, a 12% jump, following Israeli airstrikes on Iran, raising fears of disruptions in the Strait of Hormuz, a critical oil transit route. This oil shock has put significant pressure on the Indian rupee, which weakened to 86.20 against the US dollar, and government bond yields, which climbed to 6.40% before settling at 6.36%. All eyes are now on the Reserve Bank of India (RBI) as it navigates this delicate economic challenge.
India, the world’s third-largest oil importer, relies on imports for over 80% of its crude oil needs. A $10 per barrel increase in oil prices can widen the current account deficit by 0.4% of GDP and add 35 basis points to retail inflation, according to recent reports. The rupee’s slide, driven by heightened demand for dollars to cover rising import bills, creates a feedback loop: a weaker currency inflates oil costs further, squeezing household budgets and industrial margins. Posts on X reflect public concern, with many noting that the rupee now moves in lockstep with Brent crude prices, amplifying economic risks.
The bond market is equally rattled. Higher oil prices stoke inflationary pressures, pushing government bond yields upward as investors demand higher returns to offset risk. The 10-year bond yield surged briefly to 6.40% on June 13, reflecting market jitters over potential supply disruptions in the Middle East. Experts suggest that if the conflict escalates, yields could test higher levels, increasing borrowing costs for the government and businesses. This comes at a challenging time, as foreign institutional investors (FIIs) have sold ₹3,549 crore worth of Indian equities in June, adding to market volatility.
The RBI has stepped in to stabilize the rupee, reportedly selling dollars through state-run banks to curb its sharp decline. On June 13, the currency recovered slightly to close at 86.08 against the dollar, thanks to these interventions. However, traders caution that the RBI’s foreign exchange reserves, though robust at over $600 billion, could face strain if oil prices remain elevated. The central bank faces a delicate balancing act: supporting the currency while managing inflation and maintaining growth momentum after a recent 100-basis-point repo rate cut since January.
The government is also under pressure to cushion the oil shock. Excise duties on petrol and diesel, currently at ₹18–20 per litre, are a major revenue source, but past crises have prompted temporary cuts to ease consumer burdens. Official statements indicate that the Finance Ministry is weighing options like targeted subsidies or duty reductions, though these could strain the fiscal deficit. The Israel-Iran conflict’s trajectory remains a key variable: an escalation could push Brent crude toward $120 per barrel, as warned by some analysts, further complicating India’s economic calculus.
Beyond immediate measures, the oil shock underscores India’s vulnerability to global geopolitical risks. The Strait of Hormuz, through which 20% of the world’s oil flows, is a choke point that could see disruptions if tensions spill over. Recent reports also highlight broader pressures, including US tariff threats and a strong dollar, which could drive capital outflows from emerging markets like India. A $10 per barrel oil price hike could shave 0.3 percentage points off GDP growth and raise CPI inflation by 0.4 points, posing risks to India’s economic recovery.
As markets remain on edge, the RBI’s next moves will be critical. While its recent rate cuts aimed to spur growth, persistent inflation may force a pause or tighter policy stance. For now, India braces for the ripple effects of the Middle East conflict, with the rupee, bonds, and inflation in the spotlight. The government and RBI must tread carefully to shield the economy from this oil shock while maintaining stability in an increasingly volatile global landscape.
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