NEW DELHI: If the conflict in West Asia persists, India’s foreign exchange reserves could face pressure as two adverse external dynamics converge: a sustained rise in Brent crude prices and continued depreciation of the rupee.
Brent crude, the benchmark for India’s oil imports, has climbed in recent weeks, driven by escalating tensions between Iran and Israel. Fears of a wider regional conflagration - especially one that disrupts the Strait of Hormuz, through which nearly 20% of global crude flows - have triggered speculative surges in global oil markets.
Although intermittent diplomatic efforts have helped temper price spikes, Brent remains significantly elevated by recent standards.
For India, which relies on imports for over 85% of its crude oil needs, such volatility is particularly consequential. The situation is further compounded by the rupee’s depreciation. Between June 2 and 19, the currency fell from Rs 85.35 to Rs 86.84 per US dollar—a 1.75% decline.
While seemingly modest, the effect is magnified in the context of dollar-priced oil. When both crude prices and the rupee move unfavourably, the impact on import bill is considerable. Estimates suggest that each Rs 1 drop in the rupee’s value could raise the annual oil import burden by Rs 8,000–10,000 crore, assuming stable import volumes and crude benchmarks.
These pressures extend beyond the external sector. Higher crude prices typically lead to increased fuel costs, which in turn raise transport and logistics expenses, pushing up inflation. Although retail fuel prices have so far remained unchanged, public sector oil marketing companies are reportedly absorbing the excess cost—a measure that cannot be sustained indefinitely without weakening their financial health.
“The uncertainties have impacted global crude oil markets, with Brent hovering in the range of $73-76 per barrel (bbl) over the past week—up from an average of $65 per bbl during April-May 2025. While this is still lower than the fiscal 2025 average of $78 per bbl, any escalation of tensions, say through disruption of energy supply chains, could result in a further spike in oil prices.
“If crude oil prices continue to be elevated over longer periods, it could impact India Inc’s profits,” said Crisil. “Also, prolonged and increasing uncertainties can result in a rise in air/sea freight cost and insurance premiums for export/import-based sectors, so will bear watching.”
In the face of these developments, the Reserve Bank of India has adopted a cautious approach. It has intervened in currency markets via limited dollar sales to curb rupee volatility, but is also wary of depleting reserves. Simultaneously, rising bond yields reflect growing fears over inflation and a potential uptick in government borrowing.
From a macroeconomic standpoint, the dual challenge of elevated crude prices and a sliding rupee threatens to widen the current account deficit, increase financing costs, and strain fiscal balances. These pressures, if prolonged, could further complicate monetary and fiscal policy choices.
Much hinges on the West Asia conflict. A diplomatic breakthrough could ease tensions in energy markets and help stabilise rupee. Conversely, if hostilities escalate, India may confront a far more turbulent foreign exchange scenario in the second half of 2025.
At present, volatility remains a defining feature of the landscape—highlighting the persistent vulnerability of domestic economic stability to global geopolitical fault lines.