Middle East Crisis and Its Ripple Effect on Global Markets

The Finance Ministry warns that ongoing Middle East tensions could impact exchange rates and inflation due to rising petroleum and fertilizer costs. While India's economy shows resilience with strong growth and sufficient reserves, prolonged conflict may pressure the currency and affect sectors reliant on LNG and crude.

The Finance Ministry cautioned on Friday that enduring unrest in the Middle East might have adverse effects on exchange rates and inflation due to escalating prices of petroleum goods and fertilizers. The Monthly Economic Review highlights the risk of subdued capital flows impacting the currency, mainly due to a flight to safety.

The report noted the impact of the US-Israel strikes on Iran on February 28, resulting in a pivotal escalation reminiscent of the 1991 Gulf War oil shocks. This has already driven up Brent crude by around 9% to nearly USD 80/bbl, while LNG prices have risen by approximately 50%. Despite India’s heavy import reliance on crude, officials say adequate foreign reserves and low inflation could buffer some global oil price impacts.

Despite uncertainties, India’s economy remains robust, with an estimated real GDP growth of 7.6% in FY26. The external sector also shows resilience amid trade uncertainties, aided by India’s active trade diplomacy and strategic budget plans that focus on infrastructural development and competitive exports to diversify trade destinations.