The ongoing conflict in the Middle East has cast a shadow over the near-term prospects of the Indian economy. Concerns are mounting that the US-Iran tensions could impede the nation’s growth trajectory, fuel inflationary pressures, and erode corporate profitability, ultimately leading to subdued returns in the stock market.
For more than two months, crude oil prices have persistently remained above $100 per barrel. This sustained elevation is intensifying worries about its adverse effects on India’s current account deficit, inflation rates, and overall GDP growth.
Despite diplomatic overtures from both Washington and Tehran, the anticipated peace talks between the US and Iran remain at a standstill. A definitive resolution to the conflict is deemed essential to guarantee an uninterrupted supply of crude oil and LPG via the critical Strait of Hormuz, thereby facilitating a substantial reduction in prices.
The fragility of market sentiment is expected to persist as long as energy prices remain elevated. A prolonged delay in resolving the Middle East conflict is anticipated to inflict greater damage on the Indian economy.
Debopam Chaudhuri, Chief Economist at Piramal Group, observed, “Supply constraints within certain segments of India’s energy sector, combined with a sharp increase in prices, have generated near-term challenges for economic activity in the first quarter of this fiscal year. While India’s substantial economic foundation, robust foreign exchange reserves, and a diversified crude oil procurement strategy have helped mitigate the impact, this protective buffer is not infinite.”
Chaudhuri further elaborated, “Government data already indicates two consecutive months of year-on-year contraction in LPG consumption, alongside initial indications of a softening in aviation turbine fuel demand in April 2026. Both trends suggest a potential deceleration in economic activity. A protracted disruption, such as an ongoing blockade of the Strait of Hormuz, could exacerbate these trends and, coupled with elevated prices, potentially reduce GDP growth by 25–35 basis points this year.”
Nonetheless, Chaudhuri maintains that a prompt resolution to the conflict and the timely reopening of Gulf shipping routes by mid-quarter could catalyze a rapid correction in crude oil prices, thereby alleviating concerns about a more widespread slowdown in India’s economic momentum.
Dimming Growth Prospects
The Indian economy has demonstrated robust growth, expanding by over 7% annually since 2022. However, the current financial year presents potential challenges, primarily attributable to prevailing global factors.
During its April policy meeting, the Reserve Bank of India (RBI) forecast India’s GDP growth at 6.9% for FY27. The central bank also projected Consumer Price Index (CPI)-based inflation for FY27 at 4.6%, indicating it may remain within its acceptable band of 2-6%.
Despite the RBI’s projections, experts suggest that the Indian economy might experience growth in the range of 6-6.5% in the current financial year. This estimate, however, could be subject to downward revision if energy prices persist at their current elevated levels for an extended duration.
A report from the United Nations anticipates India’s economy to grow by 6.4% in FY27. Concurrently, global brokerage firm UBS has adjusted its India GDP growth forecast downwards to 6.2% for the same fiscal year.
Standard Chartered Bank has also revised its growth forecast for the Indian economy, lowering it from 7.1% to 6.4%, based on an assumption of an average crude oil price of $90 per barrel.
Should Investors Be Worried?
While India’s growth momentum is projected to face challenges this year, the nation is still anticipated to maintain its position among the world’s fastest-growing major economies.
India will not be an isolated case in experiencing a growth slowdown; major economies globally are likely to contend with the repercussions of the Middle East tensions.
Aurelien Kruse, the lead economist for India at the World Bank, asserts that India is poised to remain among the world’s fastest-growing major economies in FY27, underpinned by robust macroeconomic fundamentals.
Nevertheless, the economic recovery is expected to be gradual. Furthermore, the secondary and tertiary impacts of elevated crude oil prices could contribute to modest stock market returns this year.
Vinit Bolinjkar, Head of Research at Ventura, indicated that the Indian stock market is likely to yield only modest returns in FY27, with heightened volatility emerging as a predominant characteristic.
Bolinjkar added, “Valuations are already elevated compared to historical averages and emerging-market counterparts. Consequently, any further surge in oil prices or a weakening rupee could precipitate sharp market corrections, particularly within rate-sensitive and import-dependent sectors.”
Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, highlighted that a $10 increase in crude oil prices translates to an approximate $13-14 billion impact on India’s import bill. Prior to the conflict, India procured crude at around $65 per barrel. With prices now hovering around $100, the nation faces an additional expenditure of $50-60 billion.
Sheth suggests that the current situation might not be as detrimental as the significant crude oil price surge witnessed in 2008. However, he cautions that the primary challenges often stem from second and third-order effects, which many market participants tend to overlook in their analyses.
Sheth concluded, “Crude oil prices are expected to remain highly volatile and unpredictable until the situation in the Middle East stabilizes. This volatility, coupled with the cascading second and third-order effects, will keep markets apprehensive for the remainder of the financial year. We anticipate the Nifty index to trade within a range of 22,500 to 26,500 over the coming months.”
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