If it's not one thing, it's another for the global economy.
Even as the uncertainty over trade tariffs remains unsettled, the latest Israel-Iran war has put the world in its feels, yet again.
What's likely to happen next? Will it escalate into a full-blown regional war or even a world war, or will the tensions die down? There are no easy answers, and at this point it appears that anything is possible. There's room for all kinds of hellish phenomena and so, policy wonks have chalked out best, moderate, and worst-case scenarios, and the impact on economic and financial markets is unmistakable.
First, in the most optimistic case, where tensions will likely de-escalate after a short period of 3-6 months or more, analysts expect things to move rapidly and tear a great deal of flesh. For instance, crude oil prices soared more than 13% at one point last Friday following the overnight attacks between Israel and Iran. On Monday, Brent crude, the global benchmark, rallied another 7% to $74.60 per barrel. Likewise, gold traded 1% higher on Friday at $3,426 an ounce, close to the record high of $3,500 it hit in April.
But none expect the world to encounter just darkness and despair under this scenario. Though Friday's oil price spike marked the biggest single-day gain since 2022, analysts reason that the global benchmark Brent crude futures remain far below the prices seen in the aftermath of Moscow's incursion into the Ukraine territory. Even if the oil price shoots past $90-$100 per barrel, the impact would likely be only temporary as OPEC will promptly pitch in with higher production.
In other words, even if prices jump, they'll soon return to pre-crisis levels, which means, fears of another bout of inflation are rather limited. Global central banks will likely continue to proceed with their prevailing monetary easing cycle to support growth.
Perhaps, investors have baked this into their outlooks, which is why the stock market money mavens shrugged off broader concerns about the conflict. In fact, as geopolitical shocks are becoming frequent with several countries engaging in fire fights, markets seem to have developed the powerful mental muscles of calm and insight, and are remaining modest.
In the next scenario, analysts predict protracted tensions leading to an intensified shadow war involving Syria, Iraq, Yemen, Lebanon and others. Oil prices may then turn volatile sparked by concerns of potential supply disruptions. As higher fuel and energy costs feed into various sectors, it could lead to another episode of global inflation and compel central banks' to abruptly deviate from the ongoing monetary easing cycle and turn hawkish. Above all, as supply chains may get constrained, causing persistent economic headwinds. The impact on the overall global economy will be hard to avoid.
Coming to the worst-case scenario, where a full-scale regional war or even a world war ensues, it will end up as one of those Richter-scale moments, shattering everything. Oil prices may blow up, leading to hyperinflation, and setting off a global recession. As sea routes and shipping lines are either closed or rerouted, it could lead to significant supply chain disruptions paralyzing global trade and creating a shortage of goods and products. In the process, global manufacturing will take a hit and as production and investments stop, overall economic activity will grind to a halt. Inevitably, the world will enter into a recession if that plays out, and if the situation persists, we could even end up in a depression.
According to Goldman Sachs, a worst-case scenario involving blockades in the Strait of Hormuz could push oil prices above $100 per barrel and plunge the world into an energy crisis. Iraq has warned of even direr consequences. As its Deputy Prime Minister and Foreign Minister Faud Hussein noted, oil prices could increase to jaw-rattling $200-$300 per barrel. If it happens, all hell will break loose.
Much depends on the operations of Strait of Hormuz, a vital oil transit route separating Iran from the Gulf states and links the Arabian Sea to the Indian Ocean. It enables about one-third of the world's seaborne oil supplies every day. It was never completely shutdown, even during the long-drawn Iran-Iraq battle between 1980 and 1988. As per estimates, closure of the Strait of Hormuz could remove 5 million barrels of oil per day from the market, though there's another view that Tehran may think twice as it would disrupt its own exports.
As for India, at the moment, the Israel-Iran conflict is unlikely to cause any major economic earthquakes. But if oil prices soar uncontrollably, inflation could throw a nasty surprise, trade will stand disrupted, capital flows will be affected, while weakening rupee will widen the current account deficit. Price rise can also disrupt the near-term prospects of India's economy and derail RBI's attempts to boost growth with lower rates.
India imports over 80% of its oil needs and a price rise will leave strain our fiscal resources. According to EY, India's crude oil basket averaged $64.3 per barrel in early 2025-26. A $10 per barrel increase can reduce real GDP growth by 0.3% and raise inflation by 0.4%.
Lastly, India has significant trade exposure with both Iran and Israel. In FY25, India exported goods worth $1.24 billion to Iran and imported goods worth $441.9 million. With Israel, exports stood at $2.15 billion, while imports were at $1.61 billion. Any disruption in shipping routes will be significant and according to estimates, India's exports could face 15-20% higher logistics costs.
