India’s External Balance Under Pressure: Oil Shocks, West Asia Tensions, and Trade Trends in FY26

June 23, 2025

🔍 Geopolitical Tensions Threaten India’s Fiscal Stability

As tensions between Iran and Israel escalate, the economic fallout is becoming more visible—particularly for energy-import-dependent countries like India. A recent report by ICRA has flagged that if crude oil prices jump by $10/barrel amid West Asia instability, India’s Current Account Deficit (CAD) could widen by 0.3% of GDP. This would mean a jump of $13–14 billion in net oil imports, putting pressure on the country’s balance of payments.

Currently, ICRA estimates India's CAD for FY26 at 1.2–1.3% of GDP, assuming oil remains around $70–75 per barrel. However, if prices move into the $80–90 range, the CAD could hit 1.5–1.6%, significantly impacting the rupee’s stability against the US dollar.

🚢 Strait of Hormuz: A Critical Choke Point

The biggest concern? Iran’s warning to close the Strait of Hormuz—a crucial maritime route through which 20% of the world’s crude and LNG supplies are shipped. India imports nearly 45–50% of its oil and 54% of natural gas through this route, mainly from Qatar, UAE, Saudi Arabia, and Iraq.

Any disruption here would not only lead to supply shocks but also cause price surges, especially in the spot LNG market. This could spike India’s import bill and force policymakers to consider strategic reserves and pricing interventions.

📈 Inflation Spillover and Domestic Impact

ICRA notes that oil price hikes transmit faster into the Wholesale Price Index (WPI) than the Consumer Price Index (CPI), due to different weightage structures. A 10% increase in crude prices could lead to:

80–100 basis points rise in WPI
20–30 basis points rise in CPI

This would further complicate monetary policy decisions, especially if petrol and diesel retail prices are adjusted upward.

📊 Current Account Turns Positive in Q4 FY25… But Not for Long?

In a temporary reprieve, India Ratings and Research (Ind-Ra) reported that India’s current account balance turned surplus in Q4FY25 at around $7 billion (0.7% of GDP). This was the first surplus after three consecutive quarters of deficit, driven by strong services exports and contained import bills.

However, this may not sustain.

For Q1 FY26, Ind-Ra expects:

Merchandise exports to fall to $113 billion
Merchandise imports to rise to $189 billion
Goods trade deficit to swell by 22.4% YoY, reaching $76 billion
CAD to widen again to 1.2% of GDP

🌍 Global Trade Outlook: Headwinds Persist

Adding to the challenge is the global trade slowdown. After a strong 4.5% YoY growth in Q4FY25, the World Trade Organization (WTO) now forecasts a contraction of 0.2% in global goods trade for 2025. Emerging markets are dragging down manufacturing activity, with the Global Manufacturing PMI dipping to 49.6 in May 2025—a five-month low.

📉 What This Means for India

The combination of:

Rising oil and gas prices
Trade disruptions via the Strait of Hormuz
Declining global demand for goods
And potential currency depreciation

...could lead India into a tighter external financial situation in FY26.

India Ratings warns that if hostilities in West Asia persist, the CAD could breach 1.5% of GDP in the second half of FY26.

🧭 Final Takeaway

India’s macroeconomic outlook is now deeply intertwined with geopolitical tensions. While short-term surpluses offer relief, the risk of widening current account deficit looms large. A coordinated policy response—combining energy diplomacy, strategic reserves, and export promotion—is essential to safeguard economic stability.