The escalating Israel-Iran conflict with the possible closure of the critical Strait of Hormuz is unlikely to have major impact on the Indian inflation projections for the current fiscal, experts say.

Strait of Hormuz is the transit point for nearly one-fifth of global oil supply. Post US attack on its nuclear sites, Iran’s Parliament approved a measure to close the strategically vital gateway. On Monday, oil prices went up to their highest since January before giving up their gains and even turning negative during the European morning session. Brent has risen around 11 per cent since the conflict began on June 13, while WTI has gained approximately 9 cents.

As India imports over 90 per cent of its crude requirement, price movement would be critical to retail inflation derived from Consumer Price Index.

According to DK Srivastava, Chief Policy Advisor, EY India, by June 20, Brent crude prices had already touched $77 per barrel. With the blockade of Hormuz, this is likely to sharply increase. Some analysts predict that it may now even cross $100 per barrel and beyond.

Crude basket

“To the extent, this translates into a rise in the Indian crude basket, it will have a deleterious impact on India’s CPI inflation as well as growth. A recent RBI study showed that a $10 per barrel rise from a benchmark level of $75 per barrel in the price of India‘s crude basket could reduce India’s real GDP growth by 0.3 per cent points and increase its CPI inflation by 0.4 percentage points,” he said.

Rajni Sinha, Chief Economist with CareEdge, said Iran currently exports 1.7 million barrels per day, and even in the event of a complete disruption to this supply, other Gulf producers have sufficient spare capacity to compensate. According to the International Energy Agency, OPEC’s total spare capacity exceeds 5 million barrels per day, with Saudi Arabia alone accounting for approximately 3 million barrels per day. Higher crude prices would also improve the economics of US shale production, potentially contributing further to global supply.

“We do not anticipate crude oil prices to remain elevated for long averaging between $65–70 per barrel in FY26, barring any major disruptions to key trade route,” Sinha said.

Adding to this, Srivastava said he expects blockade of Strait of Hormuz to be temporary.

“Assuming that this crisis is short-term, we do not expect that it will have a major impact on CPI inflation or on growth. For FY26, we expect that CPI inflation will remain in the range of 4-4.5 per cent on average and real GDP growth is likely to remain in the range of 6.3-6.5 per cent,” he said.

25 bps impact

Sinha felt that from an inflation standpoint, the direct impact is likely to be contained, especially since domestic retail fuel prices are not expected to be changed. Generally, a $10 increase in average annual crude prices typically results in about 25 bps impact via both direct and indirect channels. However, with pump prices expected to remain unchanged, there should not be any direct impact.

“There can be some second order impact but since oil prices are unlikely to sustain at these levels for long, we expect it to be limited. Thus, we expect CPI inflation to remain at comfortable levels in the near term, averaging around 4 per cent in FY26,” she said.

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Published on June 23, 2025