Why India should be worried about the Israel-Iran war?

18 Jun 2025 , 11:21 AM

HOW SERIOUS IS THE ISRAEL IRAN WAR

If we avoid mincing words, the situation in the Middle East and West Asia is really serious. Despite persistent calls from the US, Iran refuses to talk peace with Israel. There are concerns that, with Iranian army top brass neutralized by Israel, there could be strategic mis-steps by Iran. Both Israel and Iran continue to hit each other with long-distance missiles.

This will be the first war that will not fought in the sea or in the trenches, but through missiles and drones. That makes it a complicated and prolonged war. Trump has issued an unveiled threat to Iran, while Israel has been seeking bunker busters from the US, to target deep nuclear facilities in Iran. Peace does not appear to be making much of a headway!

OIL HAS BEEN A CASUALTY IN THE PROCESS

One has to take a cursory glance at the oil price table to understand the chaos.

Date	Price	Open	High	Low	Change %
Jun 18, 2025	76.79	76.89	77.01	76.25	0.44%
Jun 17, 2025	76.45	74.16	77.33	72.66	4.40%
Jun 16, 2025	73.23	78.31	78.32	70.56	-1.35%
Jun 13, 2025	74.23	70.50	78.50	70.41	7.02%
Jun 12, 2025	69.36	70.23	70.40	68.36	-0.59%
Jun 11, 2025	69.77	66.60	70.83	66.47	4.34%
Jun 10, 2025	66.87	67.12	68.00	66.48	-0.25%
Jun 09, 2025	67.04	66.59	67.19	66.07	0.86%
Jun 06, 2025	66.47	65.26	66.67	64.80	1.73%
Jun 05, 2025	65.34	64.77	65.85	64.60	0.74%
Jun 04, 2025	64.86	65.52	65.95	64.27	-1.17%
Jun 03, 2025	65.63	65.16	65.95	64.51	1.55%
Jun 02, 2025	64.63	63.20	65.76	63.00	1.14%
May 30, 2025	63.90	64.11	64.67	63.65	-0.39%

Data Source: Bloomberg (Prices are $/bbl)

Since the start of June 2025, Brent crude prices are up 20.2%. The oil prices have been up on 9 out of the last 14 sessions and the average daily accretion in oil has been 1.32% since the start of June. For now, it is just supply pressures that matter, and weak demand or an economic slowdown do not figure in the calculation. So, what has driven this surge in oil?

IRANIAN OIL SUPPLIES ARE LIKELY TO BE HIT

Iran may not be as large an oil producer as its other Middle East counterparts, but it is still significant. Iran produces about 3.40 million barrels of crude per day, of which nearly 1.70 million barrels is exported. Iran plays an oversized role in global supply. Its biggest buyer of oil is China, since other countries have stayed off buying Iranian oil due to the US sanctions.

India does not buy significant oil from Iran, but it could still impact India. Israel has been consistently hitting the oil production heart of Iran. If the supplies from Iran are cut, China will move to other markets to make good the shortfall, including Russia. India buys over 40% of its oil from Russia, and if Russian oil goes up, it could create problems. The macro risks may already be reflected in the current market price, unless hostilities aggravate further.

REAL PROBLEM IS THE STRAIT OF HORMUZ

For the oil market, the real problem would arise if Iran blocks the Strait of Hormuz. Iran has, in the past, threatened to do the same, but stopped short of doing it. If pushed to a corner, Iran may use that as a hard bargaining chip. The Strait of Hormuz is a narrow water pathway through which nearly 20% of world oil and gas flows. Major oil producers like Saudi Arabia, UAE, Bahrain, Kuwait, and Qatar use the Strait of Hormuz to move their oil and gas.

Any blockade of the Strait Hormuz would put about 20% of global oil at risk and nearly 47% of Indian oil imports at risk. Remember, India still imports about 85% of its daily oil needs, and refining activity could be extensively impacted. Estimates are that a prolonged blockade of the Strait of Hormuz would not only disrupt oil markets, but also spike freight and insurance costs. The net impact could be oil getting close to $90/bbl, or even higher.

HOW THE ISRAEL-IRAN CONFLICT CAN IMPACT INDIA?

For India, a $10/bbl increase in crude prices raises current account deficit (CAD) by 0.55% of GDP and inflation by around 0.35%. It is clear how crude at $90 would impact India. There would also be a negative impact on the Indian rupee, which continues to be weak despite the dollar index being at 98 levels. It is going to post a macro shock for India, but the real challenge for India would be to balance its diplomatic and business interests.

While India did not support the condemnation of Israel at the UN Security Council or the resolution against Israel at the China SCO; India would be wary of its interests in Iran. India is also counting on the Chabahar Port in Iran to gain access to Afghanistan and Central Asia, bypassing Pakistan. With respect to Israel, India’s defence dreams are closely linked to Israel. The real challenge in the coming weeks will not just be oil prices. It would be about how these delicate diplomatic trade-offs are balanced!