Finance Ministry outlines Strait of Hormuz closure could trigger inflation surge, poses biggest external threat to India

Strait of Hormuz: The key ‘risk factor’

The Department of Economic Affairs (DEA) said the global environment has become significantly more challenging following the West Asia conflict, and underscored the centrality of the Hormuz disruption to India’s economic trajectory. “Looking further ahead, the duration of the Strait of Hormuz disruption remains the single most consequential variable for India’s external and price outlook,” the report said, adding that a quick normalisation would help set the stage for a broader-based recovery supported by strong services exports and sustained investment commitments.

Near-term outlook: Cautious resilience

Despite external headwinds, the review described India’s near-term economic outlook as one of ‘cautious resilience,’ citing stable domestic fundamentals, strong services exports, resilient labour markets, and comfortable foreign exchange reserves as supporting factors. The DEA noted India has managed to meet crude oil requirements so far through diversified sourcing arrangements even as the Strait of Hormuz remains closed amid the conflict.

Inflation risks and upstream cost pressures

The Finance Ministry flagged increasing inflation risks, pointing to a widening gap between retail and wholesale inflation that signals building upstream cost pressures. “The current divergence between retail inflation and wholesale prices signals that upstream cost pressures are building, and the pass-through to consumers, while limited so far, may not be far behind,” the review said. It warned that recent increases in petrol and diesel prices could trigger both direct and indirect inflationary effects, and that any further escalation in energy prices may erode the current inflation cushion faster than expected.

Energy, monsoon season and food-price vulnerabilities

The report also cautioned that a deficient monsoon could add food-price pressures on top of energy-driven inflation. It warned higher projected crude oil production disruptions have increased risks of supply-chain bottlenecks and sustained pressure on energy and shipping costs, developments that could delay global disinflation, postpone monetary easing by central banks and weigh on global growth- especially for energy-importing emerging economies such as India.

Gulf dependence and mitigation steps

Highlighting India’s dependence on Gulf energy, the review noted that crude oil and petroleum products made up 53.9 per cent of India’s total merchandise imports from the West Gulf Cooperation Council (GCC) region in FY26. To reduce vulnerability to global energy shocks, India has secured recent agreements with Abu Dhabi National Oil Company (ADNOC) covering strategic crude oil storage and long-term Liquefied Petroleum Gas (LPG) supply arrangements, the DEA noted.

The DEA urged that policy responses remain agile across monetary, fiscal and structural dimensions to navigate the combined challenges posed by external geopolitical risks and domestic climatic uncertainties while safeguarding medium-term growth. The report highlighted the need for coordinated policy tools to manage possible inflationary spurts and to shore up external buffers if energy disruptions persist.

What are the implications for global outlook?

The review said higher projected crude production disruptions increase the risk of broader supply-chain interruptions and sustained pressure on energy and shipping costs, which could postpone global disinflation and weaken growth. Such a scenario would particularly affect energy-importing economies and could alter the timing and pace of monetary policy normalisation worldwide.