India’s economic pains are intensifying every day that the Strait of Hormuz remains closed.
Two and a half months after the Middle East conflict began, one of the highest-performing emerging markets in recent years and the world’s third-largest crude oil importer is scrambling to contain the oil shock that is spreading to consumer prices, foreign exchange reserves, and economic growth.
Since the war began and cut off over 40% of India’s crude oil flows, those that passed through the Strait of Hormuz, one of the highest-flying economies in Asia has seen its oil import bill soar, investors fleeing the capital market, and the local currency plunging to an all-time low against the U.S. dollar.
Analysts have started to raise inflation estimates and reduce forecasts of this year’s economic growth in India, which is beginning to feel the oil supply shock well beyond the actual disruption of deliveries of oil, LNG, and liquefied petroleum gas (LPG), the primary cooking fuel in the world’s most populous country.
Fuel Crunch
While India still has enough supply and reserves of all these fuels for dozens of days, authorities are urging conservation to reduce consumption and the resulting strain on public finances and foreign exchange reserves and rates.
India’s Prime Minister Narendra Modi this weekend urged Indians to curb gasoline and diesel consumption, use public transportation where possible, and car pool as much as possible.
“Measures such these will help the nation conserve energy, save on the energy import bill and overcome the challenges arising out of the serious military conflict involving many energy producing nations,” Oil Minister Hardeep Singh Puri said.
Some LPG tankers have passed through the Strait of Hormuz since the war began, including one that exited the chokepoint for the first time since the U.S. blockade was placed mid-April.
Meanwhile, India is paying higher prices for LPG imports from elsewhere, as well as higher prices for crude oil that doesn’t need to pass through the Strait of Hormuz, pressuring the current account and foreign reserves.
The government, while urging fuel conservation, is avoiding any panic rhetoric. Puri, the oil minister, earlier this week said that India doesn’t have a supply issue and it has 69 days’ worth of crude oil stocks and 45 days of LPG supply.
To address the collapse of LPG supply from the Middle East, India has asked state refiners to maximize the output of the cooking fuel, and redirected LPG supply from industrial users to household consumers.
To shield consumers from high gasoline and diesel prices, India has kept prices at the pump much lower and has cut taxes on gasoline and diesel.
Economic Pain
But this policy is hitting local oil marketing companies (OMCs).
“Our energy sector is absorbing the brunt of the impact,” Puri said.
“OMCs are buying crude, gas and LPG at higher cost, but in order to protect consumers, they are selling final products at lower cost leading to massive mounting losses of up to ?1,000 crore per day. However, the OMCs have ensured uninterrupted energy imports and supply,” he added.
This policy may not be sustainable for much longer, and eventually retail fuel prices would have risen if the supply shock from the Middle East persists, analysts say.
“I am assuming that sometime in Q2, rather sooner than later, they will have to hike retail fuel prices because neither the fiscal buffers nor (the) buffers with the OMCs (oil marketing companies) are enough to withstand a prolonged shock,” Dhiraj Nim, an economist at ANZ bank, told Reuters last week.
The energy sector is not the only one suffering from the war-induced oil shock. India’s currency, the rupee, hit a new all-time low against the dollar on Wednesday amid high oil prices and importer demand for hedging.
PM Modi’s call on Indians this weekend also included urging citizens to reduce foreign travel and gold purchases to help conserve foreign currency reserves, which India is splashing for increasingly costly imports because of the higher oil prices.
Due to the higher oil prices, India’s annual inflation accelerated in April from March, although it was below projections. But analysts warn further acceleration is in the cards in the coming months if the Middle East crisis drags on.
If the Strait of Hormuz remains closed for more months, India’s central bank may have to intervene with monetary policy and India may have to eventually raise gasoline and diesel prices, Reserve Bank of India (RBI) Governor Sanjay Malhotra said this week.
Moreover, a massive withdrawal of foreign investors from the local capital markets is also weighing on forex reserves. Foreign investors pulled more than $20 billion out of Indian equities in the first four months of 2026, government data showed this week. These outflows have already topped last year’s record annual withdrawals, as investors have become averse to India and other emerging markets amid the Iran war.
The oil shock that the war has created will weigh on India’s economic growth in the current fiscal year to March 2027. BMI, part of Fitch, expects India’s GDP growth to slow to 6.7% in the 2026/2027 fiscal year, down from 7.7% in 2025/2026, largely due to the oil price shock.
By Tsvetana Paraskova for Oilprice.com