India Faces Energy Volatility as West Asian Crisis Threatens Supply Chains

The escalating conflict in West Asia has thrust India into a precarious economic position, forcing policymakers to confront what Nomura’s Chief Economist Sonal Varma describes as uncertainty being the new normal. As a net importer of nearly all critical energy sources—including crude oil, liquefied natural gas (LNG), and coal—India’s macroeconomic stability is inextricably linked to the security of maritime corridors, specifically the Strait of Hormuz. This narrow waterway serves as the transit point for approximately 20 million barrels of oil per day, representing a staggering 20% of total global demand. For India and its Asian neighbors, the stakes are even higher, as 80% to 90% of the energy flowing through this chokepoint is destined for Asian markets.

The current crisis represents a complex dual shock that mirrors the combined pressures of the 2022 Russia-Ukraine war and the post-pandemic recovery. Unlike a standard price spike, the present situation threatens physical supply shortages, which could lead to more persistent inflationary pressures than a simple increase in Brent crude prices would suggest. Varma notes that even if the Indian government manages to keep retail fuel prices stable through subsidies or tax adjustments, inflation will still permeate the economy through multiple secondary channels. These include rising input costs for manufacturing, increased logistics and freight expenses, and the broader impact of energy scarcity on industrial output.

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For India and its Asian neighbors, the stakes are even higher, as 80% to 90% of the energy flowing through this chokepoint is destined for Asian markets.

From a policy perspective, the emphasis has shifted toward the necessity of buffers. These buffers are not merely financial or fiscal; they encompass strategic petroleum reserves, diversified supply chains, and a renewed push for energy self-sufficiency. While India has already implemented countercyclical policy easing to support a cyclical recovery, these gains are now at risk of being eroded by external volatility. The market is closely watching how the Reserve Bank of India (RBI) and the Ministry of Finance balance growth objectives against the looming threat of imported inflation. The reliance on energy imports means that any sustained disruption in the Middle East will inevitably pressure the current account deficit and the value of the Rupee.