India’s Resilience to the Fore, How the Country Weathers the Iran War Shock

India’s Resilience to the Fore, How the Country Weathers the Iran War Shock

The Iran war has posed the greatest external shock for India since the pandemic. Firstly, oil prices rocketed, from $65-70perbarrelto$83-106 per barrel in only a few days. The rupee depreciated below ₹95 per dollar, losing its status as one of the world’s most stable currencies. Yet, the country exhibited economic resilience, thanks to a slew of swift measures, bold reforms, and policy dynamism. While global markets reeled and many economies faced stagflationary pressures, India’s macroeconomic indicators remained relatively stable. This was not an accident. It was the result of a decade of deliberate policy choices, structural reforms, and strategic accumulation of buffers. The handling of this Middle East shock demonstrates that resilience does not come in a crisis, but is formed beforehand.

The Shock: Oil, Rupee, and the Strait of Hormuz

The immediate impact of the Iran war was felt through the energy channel. The Strait of Hormuz, through which a significant portion of global oil and LPG flows, was effectively closed. Brent crude surged from pre-war levels of $65-70perbarreltoarangeof$83-106. For India, which imports nearly 90 per cent of its crude oil requirements, this was a direct hit on the trade balance. Every $10increaseinoilpricesaddsanestimated$12-15 billion to India’s import bill.

The rupee, which had been one of the world’s most stable currencies among emerging markets, depreciated below ₹95 per dollar. This was not a collapse—the rupee had faced worse during the taper tantrum of 2013—but it was a significant movement. A weaker rupee makes imports more expensive, fuels inflation, and increases the burden of foreign currency debt.

Yet, unlike in previous crises, there was no panic. The RBI did not have to resort to drastic interest rate hikes or emergency measures. The currency market remained orderly. The government did not impose capital controls or seek IMF assistance. India weathered the initial shock without breaking.

The Foundations of Resilience: Robust Macroeconomic Fundamentals

One key factor that contributed to resilience is robust macroeconomic fundamentals. India’s annual GDP growth rate had been above 7 per cent for the past three years. This is not a trivial detail. A high-growth economy has more slack, more room to absorb shocks, and more confidence from investors. A country growing at 7 per cent can tolerate a temporary slowdown to 5-6 per cent without falling into recession. A country growing at 3-4 per cent would be pushed into negative territory by the same shock.

Foreign exchange reserves were at $700billion,enoughtocoveraround11monthsofimports.Thisisamassivebuffer.Inthe1991balanceofpaymentscrisis,Indiahadreservestocoverbarelytwoweeksofimports.The$700 billion figure is not just a number; it is a statement of credibility. It signals to foreign investors, rating agencies, and trading partners that India can withstand external shocks without defaulting on its obligations or resorting to desperate measures.

The current account deficit (CAD) was only 0.8 per cent of GDP during the first half of FY26. A low CAD means that India is not overly dependent on foreign capital to finance its imports. A low CAD also means that the country is not living beyond its means. In previous crises—the 2013 taper tantrum—India’s CAD had ballooned to nearly 5 per cent of GDP, making it vulnerable to sudden stops in capital flows. The current low CAD is a testament to years of fiscal discipline, export promotion, and import substitution.

Energy Planning: Diversification and Discounted Russian Crude

The second factor is its energy planning and management, wherein India has been able to diversify the energy supply mix and manage disruptions. A case in point is the significantly large share of discounted Russian crude, which made up 35-40 per cent of overall energy imports in FY25. After the Russia-Ukraine war, Western nations imposed sanctions on Russian oil, driving down its price. India stepped in as a willing buyer, securing crude at discounts of $15-20 per barrel below global benchmarks. These savings were not trivial; they amounted to billions of dollars annually.

Russian oil did provide a vital price cushion amidst the oil supply shock. When the Iran war broke out and global prices spiked, India was still receiving Russian oil at pre-war contracted prices. This created a significant arbitrage. Domestic fuel prices did not have to rise as much as they would have otherwise. The government saved on subsidy bills. The RBI had less pressure on the currency.

What also helped India were the agreements to purchase LPG from the US, accounting for around 10 per cent of the country’s import demand, and alternative sourcing channels—West Africa, the Americas, and Australia—thereby reducing reliance on the Hormuz chokepoint. The Strait of Hormuz is not the only route for energy supply. By diversifying sources, India reduced its vulnerability to its closure. A pipeline from West Africa, a sea route from Australia, a long-term contract from the US—each new source adds to the system’s redundancy.

Financial Resilience: SIP Flows and Domestic Financialisation

Financially, monthly Systematic Investment Plan (SIP) inflows exceeding ₹30,000 crore provided counter-cyclical liquidity, reducing reliance on volatile foreign portfolio flows. Of course, equity markets corrected—the Nifty fell from its highs—but a decade of domestic financialisation is showing results. The Indian mutual fund industry has grown to over ₹60 lakh crore in assets under management (AUM). Retail investors, through SIPs, are now a stabilising force. When foreign investors panic and sell, domestic investors often buy the dip. This was visible during the initial weeks of the Iran war: FPI outflows were partially offset by DII (domestic institutional investor) inflows.

This is a structural shift. In the 2008 global financial crisis, India had no domestic institutional investor base to speak of. The stock market collapsed because foreign investors were the only marginal buyers. Today, the domestic mutual fund industry, insurance companies, and pension funds provide a deep pool of local capital. They are less volatile than foreign money because they are driven by long-term savings goals, not short-term geopolitical events.

Government Response: Speed, Coordination, and Diplomacy

Speed and coordination of policies have been notable as well. For instance, under the Natural Gas Supply Regulation Order 2026, priority for gas supply was given to domestic consumption, while limiting its use for industry. Commercial gas supplies were reduced by up to 50 per cent, thereby protecting 330 million households from shortages. This was not a market-based solution; it was a command-and-control intervention. But in an emergency, such measures are necessary. The government identified that households are more vulnerable than industry, and households have less ability to absorb price shocks. By prioritising household supply, the government prevented a social crisis.

At the same time, prompt changes in excise duties were used to buffer shocks from global oil price volatility and to protect consumers. When crude prices rose, the government cut excise duties on petrol and diesel, absorbing some of the increase rather than passing it on fully to consumers. By doing so, India gained additional financial manoeuvrability. The fiscal cost was significant—an estimated ₹7,000 crore per fortnight—but the government judged that protecting consumption and avoiding inflation was worth the sacrifice.

India’s balanced diplomacy was another key element of its response where it ensured case-by-case clearance of Indian oil and LPG tankers passing through the Strait of Hormuz. India maintained communication channels with both the US and Iran, ensuring that its ships were not targeted. It did not take sides. It did not publicly condemn Iran or endorse US strikes. It simply asserted its right to navigate international waters under UNCLOS. This pragmatic, non-ideological foreign policy paid off. Indian tankers were among the first to be allowed through after the ceasefire.

The RBI’s Role: Curbing Rupee Volatility

The RBI has been able to curb rupee volatility through shrewd regulation. It did not panic and hike rates aggressively. Instead, it used a combination of interventions: selling dollars from reserves to stabilise the currency, raising the interest rate on foreign currency deposits to attract NRI flows, and widening the trading band to allow gradual adjustment rather than sharp jumps. It also used forward contracts to smooth volatility.

Favourable food inflation trends also provided policy flexibility, allowing the RBI to avoid rate hikes despite energy price pressures. Normally, an oil price shock would force a central bank to raise rates to prevent second-round inflation effects (wage-price spirals). But because food inflation was benign—due to a good monsoon and buffer stocks—the RBI could afford to wait. It did not have to choose between fighting inflation and supporting growth. The food buffer gave it policy space.

The Services Export Advantage

The composition of Indian exports has also proved to be a boon in this crisis. Close to 45 per cent of India’s exports are service-based, valued at approximately $380 billion. Services are less sensitive to shipping disruptions than goods. A software export does not need a ship or a port; it travels through fibre-optic cables. The Iran war did not disrupt India’s IT exports. In fact, companies are trying to digitise their operations, increase cybersecurity spending, and reduce costs—areas where Indian IT firms have a comparative advantage. The war created demand for cybersecurity, remote infrastructure management, and digital transformation, all of which are Indian strengths.

The Energy Transition: A Shot in the Arm

India’s calibrated strategy on energy transition has proved to be a shot in the arm during this energy crisis. Over 250 GW non-fossil power installed capacity reduces its dependence on imported fossil fuels such as gas and oil for power generation. When global oil prices spike, India can rely on solar, wind, hydro, and nuclear to generate electricity. The marginal cost of renewable energy is zero. A solar panel does not become more expensive when the Strait of Hormuz is closed.

The transition is not complete. Coal still dominates India’s power mix. But the direction is clear. Every new renewable megawatt reduces the country’s exposure to oil price shocks.

Sustaining Resilience: The Path Ahead

Nevertheless, resilience requires to be sustained. Three things are important.

First, the transition to renewables needs to move quickly. The government has set a target of 500 GW of non-fossil capacity by 2030. This target must be met, and exceeded. Every additional megawatt of solar or wind is a hedge against the next oil shock.

Second, there is a need to diversify the economy from remittances. Remittances from the Gulf are a significant source of foreign exchange—around $100 billion annually. But dependence on remittances is a vulnerability. If the Gulf economies suffer due to war or oil price collapse, remittances will dry up. India needs to expand other sources of foreign exchange: manufacturing exports, services exports, tourism, and foreign direct investment.

Third, fiscal headroom must be regained as soon as oil prices stabilise to create another cushion for future shocks. The government cut excise duties during the crisis, reducing its revenue. When oil prices normalise, the government should raise excise duties back to pre-crisis levels—or even higher—and use the proceeds to build a fiscal buffer. A rainy-day fund for energy shocks would allow the government to absorb future price spikes without cutting essential spending.

Conclusion: Resilience Formed Beforehand

What the handling of this Middle East shock demonstrates is that resilience does not come in a crisis, but is formed beforehand. It rests in the forex reserves quietly accrued over the past decade. The building of renewable capacity, coal reserves and output, and the quiet accumulation of SIP investment were key features of this build-up of resilience. India did not become resilient in March 2026. It became resilient through a decade of hard choices: liberalising the economy, building infrastructure, promoting digital payments, expanding financial inclusion, and maintaining fiscal discipline. The Iran war tested that resilience. India passed the test. But the next shock is always around the corner. The work of building resilience never ends.

Q&A: India’s Resilience During the Iran War Shock

Q1: What were the immediate economic impacts of the Iran war on India?

A1: The Iran war caused oil prices to rocket from $65-70perbarrelto$83-106 per barrel in just a few days. The rupee depreciated below ₹95 per dollar, losing its status as one of the world’s most stable currencies. For India, which imports nearly 90 per cent of its crude oil requirements, this was a direct hit on the trade balance (every $10increaseinoilpricesadds$12-15 billion to the import bill). Despite these shocks, India exhibited economic resilience due to robust macroeconomic fundamentals, swift policy measures, and strategic buffers built over the past decade.

Q2: What were the key macroeconomic buffers that helped India withstand the shock?

A2: India had three key macroeconomic buffers:

• High GDP growth: Annual GDP growth had been above 7 per cent for the past three years, giving the economy slack to absorb shocks without falling into recession.

• Large forex reserves: $700 billion, enough to cover around 11 months of imports (compared to barely two weeks during the 1991 crisis). This signalled credibility to foreign investors and rating agencies.

• Low current account deficit (CAD): Only 0.8 per cent of GDP during the first half of FY26, meaning India was not overly dependent on foreign capital to finance imports.
  These buffers were not created during the crisis; they were “quietly accrued over the past decade.”

Q3: How did India manage its energy supply during the crisis?

A3: India used multiple strategies:

• Discounted Russian crude: Russian oil made up 35-40 per cent of overall energy imports in FY25, providing a vital price cushion (discounts of $15-20 per barrel below global benchmarks).

• Diversified LPG sources: Agreements to purchase LPG from the US (10 per cent of import demand) and alternative sourcing channels from West Africa, the Americas, and Australia reduced reliance on the Hormuz chokepoint.

• Priority to domestic consumption: Under the Natural Gas Supply Regulation Order 2026, government gave priority to household gas supply, limiting industrial use (reducing commercial gas supplies by up to 50 per cent), protecting 330 million households.

• Excise duty cuts: The government cut excise duties on petrol and diesel to absorb some of the price increase, protecting consumers (at a fiscal cost of ₹7,000 crore per fortnight).

Q4: What role did domestic financial markets play in stabilising the economy?

A4: Monthly Systematic Investment Plan (SIP) inflows exceeded ₹30,000 crore, providing counter-cyclical liquidity and reducing reliance on volatile foreign portfolio flows. This is a structural shift: in 2008, India had no domestic institutional investor base; foreign investors were the only marginal buyers. Today, the domestic mutual fund industry (over ₹60 lakh crore AUM), insurance companies, and pension funds provide a deep pool of local capital that is less volatile and driven by long-term savings goals. When foreign investors panic and sell, domestic investors often “buy the dip.” The RBI also curbed rupee volatility through interventions, forward contracts, and widening the trading band.

Q5: What does the article recommend to sustain resilience for future shocks?

A5: The article recommends three actions:

1. Accelerate renewable energy transition: The 500 GW non-fossil capacity target by 2030 must be met and exceeded. Every new renewable megawatt (solar, wind, hydro, nuclear) reduces dependence on imported fossil fuels—the marginal cost of renewable energy is zero, unaffected by Strait of Hormuz closures.

2. Diversify the economy from remittances: Gulf remittances (~$100 billion annually) are a vulnerability. India needs to expand other foreign exchange sources: manufacturing exports, services exports, tourism, and foreign direct investment.

3. Regain fiscal headroom: When oil prices stabilise, the government should raise excise duties back to pre-crisis levels (or higher) and build a fiscal buffer/rainy-day fund for energy shocks, allowing future price spikes to be absorbed without cutting essential spending.
   The article concludes: “Resilience does not come in a crisis, but is formed beforehand.” India passed the Iran war test, but “the work of building resilience never ends.” The next shock is always around the corner.