The Israel-Iran conflict has intensified from covert tensions to a full-fledged confrontation, reaching its most destructive phase yet. This precarious situation places New Delhi in a challenging diplomatic position, requiring astute manoeuvring to uphold its strategic ties with both nations while safeguarding its broader regional interests.
With de-escalation seeming increasingly elusive, the region faces growing instability. Tel Aviv and Tehran hit each other with barrages of missiles and drones over the weekend. Israeli airstrikes struck a section of Iran’s South Pars Gas Field, the Shahran fuel depot in northern Tehran which resulted in a massive fire that engulfed at least 11 storage tanks, also hitting the Shahr Rey oil refinery in southern Tehran. A fragment of interceptor shrapnel was discovered at the Kishan West section of Israel’s Haifa port—operated by the Adani Group—however, port operations remained uninterrupted. The military escalation has roiled global oil markets, with Brent crude spiking as much as 13%, nearing the $80-per-barrel mark.
The surge in global oil prices presents a formidable challenge for India's economy, exacerbating import costs, fueling inflationary pressures, and potentially undermining the Reserve Bank of India’s recent policy measures. India’s crude oil basket, which had averaged $64.3 per barrel in early 2025-26, now faces the risk of a sharp reversal if prices continue to climb. The rupee responded swiftly to these developments, opening at 86.14 per US dollar, a 54-paise depreciation from the previous day’s close of 85.60. The correlation is direct: as oil prices rise, Indian refiners require additional dollars for payments, driving up demand for the currency, weakening the rupee, and further inflating the cost of imports. This cycle amplifies the current account deficit, heightening economic vulnerabilities.
JP Morgan projects that oil could soar to $120 per barrel should the conflict escalate further. A sustained uptrend in crude prices may force the Reserve Bank of India to reconsider its monetary stance—delaying anticipated rate cuts or maintaining a tighter policy to counter inflation risks.
A broader regional war involving Iran has the potential to disrupt marine traffic in the Strait of Hormuz, from where nearly 25% of the world’s oil supplies pass. Almost 2 million barrels per day of crude oil reaches India through the strait. Should tensions escalate further, disruptions to trade routes and energy supplies appear inevitable. Even if petrol and diesel prices remain stable in the near term due to government intervention, the rising cost of transporting goods and services could gradually feed into broader inflationary trends.
The longer the conflict lasts, and the more distrust it creates in the region, the tougher it will become to initiate the ambitious India-Middle East-Europe Economic Corridor (IMEC) Project which plans to connect the Indian ports to Fujairah, Jebel Ali, and Abu Dhabi in the UAE, Dammam and Ras Al Khair ports in Saudi Arabia further to Haifa in Israel and onward to the European ports of Piraeus, Messina and Marseille.
IT majors like Infosys, Wipro, Tech Mahindra, and Tata Consultancy Services have made acquisitions or investments in Israel in some form or the other. Extensive pessimism is unwarranted as Indian markets were largely resilient amid the war in Gaza. Nevertheless, the capital market is sentiment-driven and this war could negatively impact the BSE and Nifty levels. The bond market is already reacting, with yields moving higher in anticipation. It's interesting that among the notable gainers on the Nifty 500 index were Shipping Corporation of India Ltd. (SCI) and GE Shipping Ltd., signalling that energy supply chains could emerge as a focal point in the unfolding crisis.
As far as trade is concerned India has a sizable trade with both Iran and Israel. India enjoys a positive balance of trade with Israel, exporting diesel and polished diamonds and importing rough diamonds, electronics and telecom components like chips, and parts of photovoltaic cells, in addition to potassium chloride and fertiliser and herbicide. With Iran, India’s export trade is worth $1.7 billion, largely consisting of rice, while imports include methanol and petroleum coke.
India has expressed deep concern and urged both sides to exercise restraint. Prime Minister Narendra Modi has spoken with his Israeli counterpart, Benjamin Netanyahu and External Affairs Minister S. Jaishankar engaged in a telephonic conversation with Iranian Foreign Minister Seyed Abbas Araghchi, reiterating the need for a swift return to diplomacy.
It has been felt that since India is perhaps the only country which enjoys the confidence and trust of both Iran and Israel, it is in a position to meaningfully mediate in the ongoing conflict. However, this may be easier to imagine than achievable. The Middle East stands on the brink of intensified conflict, with rising tensions even derailing the U.S.-Iran nuclear talks that were set to take place in Oman. While shared strategic imperatives have deepened India-Israel ties, its historical relationship with Iran remains bolstered by significant investments, notably in the Shahid Beheshti terminal at Chabahar port. Given these intricate connections, India must uphold a largely neutral stance. This equilibrium in navigating West Asian geopolitics enables New Delhi to safeguard its interests while deftly manoeuvring through the region’s shifting dynamics.
The author is an analyst of strategic and geoeconomic affairs.