US President Donald Trump wrote on Truth Social, “Ships of the World, start your engines,” announcing an imminent peace deal with Iran and the reopening of the Strait of Hormuz. “Let the oil flow!” he declared. The deal is reportedly scheduled to be signed on Friday in Geneva.
The closure of the Strait of Hormuz had driven global crude oil prices to surge, causing an economic shock worldwide. India, which imports nearly 90% of its oil needs, felt the impact acutely. The rupee depreciated sharply, petrol and diesel prices rose, inflation climbed, forex reserves fell, the oil import bill increased, foreign investors exited, stock markets declined, and GDP growth forecasts were trimmed. However, a peace deal could reverse these trends, though skepticism remains given past failed agreements. If realized, the negative effects of the US-Iran war on the Indian economy might be limited to a few quarters.
Crude Oil, Petrol, Diesel, and LPG Prices
Crude oil prices have already shown a temporary nature of their rise. If the Strait of Hormuz opens, global supply could be restored in coming months, bringing prices down. From peaks of around $120 per barrel during the conflict, crude prices have dropped below $85 per barrel amid hopes of peace. According to SBI Research, every $10 per barrel increase in crude oil prices may widen the current account deficit (CAD) by 36 basis points in FY27. Falling crude prices would help check the widening CAD. A recent Fitch report sees the oil market returning to oversupply once the crisis is resolved. “The disruption does not alter the longer-term direction of the market, which is expected to return to surplus conditions later this year,” Fitch Ratings said. The agency expects crude oil prices to average around $87 per barrel in 2026.
For India, petrol and diesel prices have risen by Rs 7.5-8 per litre since May 15, 2026, after the government had earlier cut excise duties to keep prices in check. Oil marketing companies continue to suffer losses on retail sales. LPG prices for domestic cylinders have also been increased twice since the conflict began. Even as supplies ease and global prices decline, it may take time for retail prices of petrol, diesel, and LPG to fall meaningfully.
Rupee
The rupee stands to be one of the biggest beneficiaries. It has been on a record depreciation spree, dropping to almost 97 against the US dollar recently. Already weakened in 2025 due to foreign outflows, the Middle East crisis dealt a further blow. The Reserve Bank of India (RBI) and the government have taken steps to attract foreign inflows, including tax exemptions on bonds, which have helped stabilize the currency.
Jateen Trivedi, VP Research Analyst - Commodity and Currency at LKP Securities, said, “If the US-Iran peace deal is formally signed and the Strait of Hormuz returns to normal pre-war traffic conditions, it would be a significant positive for the rupee. The biggest benefit would come through smoother crude oil supplies, reduced freight and insurance costs, and lower concerns over India’s import bill. Since India imports a large portion of its energy requirements, normalization of crude flows can improve sentiment towards the rupee and reduce pressure on the current account deficit.”
The rupee has already shown signs of recovery over the past few sessions as markets anticipate a resolution. “A stable energy market environment would further support the currency and could encourage foreign investors to reassess emerging market allocations. However, the key factor from here will be FII flows. Even if crude-related pressures ease, persistent FII outflows could still limit rupee gains and remain a concern for overall currency stability,” Trivedi cautioned.
“Technically, the rupee has important support near the 95.00 zone. As long as it holds above 95.25, the recovery trend remains intact and a move towards 94.00 cannot be ruled out in the coming weeks if geopolitical conditions continue to improve and capital flows stabilize,” he added.
Balance of Payments
Chief Economic Advisor V. Anantha Nageswaran recently called the ongoing situation a live balance of payments ‘stress test’ for India. With higher crude import bills, continued foreign investor outflows, and a weakening rupee, India has been striving to keep its balance of payments deficit under control. If the rupee appreciates, foreign investors return, and the oil bill reduces, forex pressure will ease, allowing the current account deficit and balance of payments to recover.
Stock Market and FIIs
The immediate impact of the US-Iran war on stock markets was severe. In March alone, investors lost as much as Rs 51 lakh crore due to the conflict. Markets have since been volatile, recovering intermittently on hopes of a resolution. The Sensex is down over 6% since the start of March, though it has recovered recently. Foreign Institutional Investors (FIIs) have been selling relentlessly. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, said, “One of the factors that triggered big FII selling recently has been the continuous weakness in the rupee. With initiatives by the government and RBI to attract more capital, the rupee has stabilized. Now with Brent crude crashing to around $84 from the peak of $119.5, India’s current account deficit will decline. This augurs well for the rupee. With rupee stabilizing and even appreciating, FII selling will taper off. The rupee can eventually appreciate to 93 to the dollar. This is positive for FII flows and the stock market.”
“Investors can be optimistic but not euphoric. It will take some time for FIIs to turn buyers in India. Also, the expected poor monsoon is a concern,” he cautioned.
Inflation
The impact of the US-Iran conflict is reflected in wholesale price inflation, which touched almost double digits in May, rising steadily since the war began. Consumer Price Index (CPI) data, tracked by the RBI, shows a more moderate increase and remains below the central bank’s target of 4%. As crude oil prices fall and input costs decline, inflation is likely to moderate, easing fiscal and monetary math for the government. However, the prospect of El Nino affecting monsoon and food prices could add inflationary pressure.
GDP Growth
India remains the world’s fastest-growing major economy, and the IMF has marginally raised its growth forecasts for the current year. However, many economists have flagged the impact of the US-Iran war on GDP over the next few quarters. The RBI cut its growth prediction for FY 2026-27 to 6.6% in June from 6.9% projected in April. If the Middle East conflict finds a lasting solution, the negative impact on the Indian economy is likely to be transient.
The Road Ahead
The global economic outlook remains fragile. India’s domestic story is strong but faces external headwinds. Any meaningful relief will come only if the US and Iran end the conflict and trade flows via the Strait of Hormuz restart without disruptions. Rajnish Gupta, Partner, Tax and Economic Policy Group at EY India, said, “An easing of geopolitical tensions, combined with the reopening of key trade routes, should help correct global oil prices, ease fuel-driven inflation, reduce pressure on the fiscal deficit, and provide support to the rupee. Beyond energy, the removal of supply chain disruptions will also give a meaningful fillip to manufacturing activity and export recovery to the West Asian region.”
“At the same time, we are mindful that a series of steps still need to fall into place — normalization of trade routes, stabilization of global supply chains, and sustained diplomatic momentum for these gains to fully materialize,” he concluded.
