The Modi government is bracing for the fallout of the escalating tensions in the Middle East, which could push crude oil and LNG prices higher and revive concerns over inflation, trade balances and fiscal stability. This follows the coordinated US-Israel strikes on Iran and the taking down of its top leadership. With Iran targeting US bases around the region and inflicting collateral damage, a sharp escalation in regional hostilities is expected, raising the risk of supply disruptions.
The view in strategic circles in India is that, while the US-Israel axis is miles ahead of Iran in terms of defence technology and air power, the latter still possesses an arsenal of deadly missiles, which it has built up after the war with Iraq. Officially, the government is walking the tightrope amid the conflict. While seeking the safety of civilians in a region that is home to a nearly 10-million-strong Indian diaspora, the government has also stressed in its tough balancing act that the sovereignty and territorial integrity of all states must be protected. Before the conflict began, S. Jaishankar, minister for external affairs, spoke to his Iranian and Israeli counterparts, Seyed Abbas Araghchi and Gideon Sa’ar, respectively, to express deep concern and to reiterate India’s call for dialogue and diplomacy to de-escalate tensions. At immediate stake is the future of 3,000 Indian students in Iran – over 2,000 of them being from Kashmir.
What is worrying New Delhi, however, is that it may come under pressure from Washington and Tel Aviv to take clearer positions, as casualties mount and negotiations stall. For some time now, preserving energy flows, protecting its diaspora and keeping diplomatic channels open with all three – the US, Israel and Iran – has defined India’s diplomatic strategy in the region.
Betrayal of India’s values?
The government is also preparing to deal with the political fallout at home. Demonstrations in support of Iran by the Shia population have been held in Srinagar, Lucknow and Delhi. Prime Minister Modi will have to deal with the Opposition that has said that the government’s response to the war unleashed on Iran has been a ‘betrayal’ of India’s values, principles and interests. “Modi visited Israel on 25-26 February 2026, at a time when the entire world was aware that a US-Israel military attack on Iran for regime change was imminent,” said Jairam Ramesh, general secretary & spokesman of the Congress party. “The assault began just two days after Modi left Israel, where his speech to the Knesset was a display of shameful moral cowardice”.
The ministry of petroleum was already closely monitoring the trajectory of Brent crude, which has climbed to multi-month highs. Any sustained disruption in shipping activity now through the Strait of Hormuz could drive prices well beyond current levels. More than crude, it is also LNG supplies that are a matter of concern.
With this in mind, the ministry for shipping is tracking developments around shipping routes in the Gulf region. Nearly 20 per cent of global oil flows and over 40 per cent of India’s crude imports pass through the Strait of Hormuz, making it a key vulnerability for the domestic economy. According to JM Financial, every $1 per barrel increase in crude prices could raise India’s annual import bill by roughly $2 billion.
If the crude price remains high for an extended period of time, our balance of trade and balance of payments will be impacted, since we import about 85 per cent of our oil requirements. If the Strait of Hormuz is closed (there are unconfirmed reports of this), the crude price can spike further. There is a fear that US President Donald Trump may forcefully reopen this. But that requires boots on the ground, which will escalate tensions further.
Turning to Indian equity markets, which may go through a heightened period of volatility, JM Financial has noted that, while upstream oil and defence companies may see relative support, sectors such as oil marketing companies, paints, aviation and chemicals could come under pressure from higher input costs. The brokerage added that the sustainability of Brent above $80 per barrel and the duration of any supply disruption would be critical variables for Indian equities.
V.K. Vijayakumar, chief investment strategist, Geojit Investments, also says that the near-term impact will be negative. “Medium-term impact on the market will depend on how long the conflict lasts,” said Vijayakumar, commenting on the medium-term outlook. “We don’t know the answer to this question. After crippling Iran, the US and Israel may make a strategic withdrawal. The market will react negatively. In a weak market, upstream oil companies and defence stocks will do well.”