NEW DELHI : The latest US sanctions on Iran could hit India through higher crude oil prices, costlier freight and insurance, tighter payment channels and renewed pressure on the rupee, even as the direct impact on trade is expected to remain limited, according to experts.
The bigger risk for India is not the loss of Iranian crude, New Delhi currently has limited direct exposure, but what happens to global oil markets if Iranian supplies are squeezed further.
China, the biggest buyer of Iranian oil, could be forced to compete more aggressively for Russian and other alternative barrels, pushing up prices for Indian refiners as well.
US Treasury Secretary Scott Bessent on August 24 announced a fresh wave of sanctions and put Iran’s trading partners on notice, as Washington launched an “economic D-Day” campaign aimed at ending its six-month war with Tehran by choking off the West Asian nation’s economic lifelines.
“We are launching an economic onslaught against Iran’s financial connections around the globe,” Bessent said, describing the effort as the “economic asphyxiation of this regime.”
The Treasury’s latest action expands the sectors exposed to US secondary sanctions to digital assets, technology, gold, aviation and shipping.Oil prices steadied on August 25, after falling more than 2 percent in the previous session, as investors assessed the impact of harsher US secondary sanctions against Iran.
For India, analysts say, the most immediate transmission channel is likely to be energy, followed by shipping, insurance and payment disruptions.
China’s hunt for alternative crude may push up India’s oil bill
“India’s direct exposure to Iranian crude is currently very limited, as India does not buy Iranian crude. Therefore, tighter sanctions won’t materially impact direct imports in the immediate term. India’s bigger exposure comes from second-order effects, particularly through China,” said Sumit Ritolia, Lead Research Analyst, Modelling and Refining, Kpler.
“If China, which imports the vast majority of Iranian crude, is forced to source oil elsewhere, it will increase competition for the alternative barrels that India relies on. This demand reshuffling would likely push benchmark prices higher, resulting in a higher import bill for India,” he said.
China imported 823,000 barrels per day (bpd) of Iranian oil in July and 534,000 bpd in August, according to data provided by ICRA.
The Chinese response is therefore critical for the global oil market. If Beijing’s refiners increase purchases of Russian crude and other alternative supplies, Indian refiners could face greater competition for barrels that have become an important part of India’s energy mix.
“Even during the Strait of Hormuz blockade during the war, Chinese haven’t been buying much oil aggressively because they have been tapping their own reserves. One of the apprehensions was that if China comes to the market, it will tighten supply,” said Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA Limited.
International Energy Agency members have also been liquidating strategic reserves. Out of the 400 million barrels earmarked for release, around 293 million barrels have been liquidated, according to Vasisht.
“So once these countries start coming back and China comes to the market too then there would be additional competition for the existing available crude supplies. And as China has come to the market for Russian crude in a big way, it can tighten supplies and increase oil prices,” he said.
Praveen Rai, Director, Grant Thornton Bharat also noted that that every $10 per barrel increase in crude prices could widen India’s current account deficit by around 0.3-0.4% of GDP. Therefore, the biggest fallout for India would likely come not from direct trade with Iran, but from tighter global energy markets and higher energy costs,” Rai said.
Higher oil prices could pressure rupee, inflation
India imports close to 90 percent of its crude requirements, making the country highly sensitive to sustained increases in global oil prices.
“The renewed escalation in the Iran conflict presents a significant macroeconomic risk for India, primarily through higher energy prices rather than an immediate shortage of crude,” Ritolia said.
A sustained rise in crude prices would widen India’s import bill, put pressure on the rupee and current account and feed into inflation through freight, aviation, manufacturing and other energy-intensive sectors.
India’s merchandise deficit widened to nearly $32 billion in July 2026 as crude oil and petroleum product imports rose 17.6 percent year-on-year to $18.31 billion
The government may initially shield consumers from the full increase in petrol, diesel and LPG prices, but that would shift the burden to public finances and oil-marketing companies, he said.
Brent crude was hovering around $92 per barrel on August 25.
Brent crude touched as high as $126/bbl in April amid raging West Asia war. It fell sharply from above $100 a barrel after the US-Iran ceasefire was announced in June, dropping below $80 but has started to rise again amid continued tensions in the region.
“For India, the principal risk is therefore higher oil prices rather than a physical shortage of crude. Elevated crude prices would raise the import bill, put pressure on the rupee, and add to inflationary pressures,” said Rai.
Russian crude may not offer an easy solution
Indian refiners are likely to continue diversifying purchases, including towards Russian crude where feasible, while seeking additional supplies from the Middle East and other regions.
But Russia may have limited additional volumes available for India.
“Tighter sanctions on Iran are unlikely to benefit Russia to a large extent because Russia is already supplying maximum volumes to India, running at roughly 2.5–2.8 mbd, or about half of India’s imports,” Ritolia said.
“Instead, a shortfall in available discounted barrels globally poses a broader risk to global supply tightness.”
Russian crude is already trading at premiums, according to Ritolia. Higher premiums would directly affect India’s import bill and refinery economics.
“Russian crude has become the backbone of India’s energy security, allowing refiners to sustain high utilisation rates while reducing dependence on Hormuz-transited supplies. Increasing premiums significantly increase India’s import bill, worsen inflationary pressures, put additional strain on the current account and weaken energy security. Domestic fuel prices would come under considerable upward pressure,” he said.
Tighter sanctions on Iranian oil could benefit alternative suppliers such as Russia, Saudi Arabia, the UAE, and the US by redirecting demand away from Iranian barrels.
Longer shipping routes could add to India’s costs
The energy risk is not limited to the price of crude.
India may have to source more oil from distant markets if Middle Eastern supply routes remain disrupted. That would increase transit times, tie up working capital and raise freight and other logistics costs.
“The Strait of Hormuz has been choked for some time now. But there are these alternate routes like Fujairah, Yanbu, and the Red Sea. Now, if they target across these locations also then it is a cause for concern. The flow through the Red Sea has come down to 22-23 vessels per day from 77 vessels earlier,” said Vasisht of ICRA.
He said India may need to diversify its crude sourcing to more distant markets, which could hurt in two ways.
Freight rates on key supply routes have risen 137-411 percent since late February and war-risk insurance for a single Strait of Hormuz voyage climbed to as high as $7.5-10 million, as per analysts.
First, if global supply becomes increasingly constrained, the demand-supply imbalance could worsen. Second, sourcing more crude from markets such as the US would mean longer transit times, tying up working capital and increasing freight and logistics costs.
India’s exposure to the Gulf also extends beyond crude. The country imports as much as 90 percent of its LPG requirements from the Middle East, making any prolonged disruption in regional energy flows a wider concern.
Direct impact on India-Iran trade seen limited
The direct impact on India-Iran trade is likely to remain limited because bilateral trade has already fallen sharply following years of US sanctions, banking restrictions and the loss of Iranian crude as a major Indian import.
India’s total trade with Iran stood at $1.04 billion in April-June of FY27, primarily driven by a sharp increase in imports from the country.
Exports to Iran fell 57.2 percent year-on-year to $149.38 million in April-June 2026, from $349.02 million in the corresponding period a year earlier, according to data from the commerce ministry.
Basmati rice remained India’s largest export item to Iran, at $103.13 million in the quarter.
Other significant exports included sugar, non-basmati rice: $6.74 million, drug formulations and biological, handicrafts, tea and spices.
The latest sanctions could nevertheless make this smaller trade relationship more expensive and difficult by raising payment, insurance and shipping costs, exporters said.
India has traditionally routed a significant portion of Iran-bound exports through the UAE, which has acted as a trading and financial hub.
“Most of our exports go through UAE and then payment comes through UAE, but Dubai and Iran trade is not happening. We used to invoice only UAE, so we used to get dollars. But it was flown to Iran,” an Indian exporter said.
Banks, insurers, shipping companies and intermediaries may become increasingly cautious about Iran-linked business, potentially increasing compliance costs or refusing transactions altogether.
The impact could be particularly significant for rice exporters.
India exported $109.9 million of rice to Iran during April to June of 2026
Any prolonged disruption to the UAE-Iran trade corridor could therefore affect Indian basmati millers and exporters, particularly through higher freight and payment costs.
For pharmaceuticals, however, the latest sanctions are adding pressure to a market where India’s position has already weakened because of Iran’s efforts to build domestic manufacturing capacity.
“Fortunately for us, a couple of years ago, Iran established local manufacturing units. During this shift towards localisation, from pharma to bulk drug imports, India no longer enjoyed the same position. Iran started importing intermediates as well, and not just APIs,” said Namit Joshi, Chairman, Pharmaceuticals Export Promotion Council of India (Pharmexcil).
“The impact would have been felt a couple of years ago, but not now. Iran has been trying to establish its own domestic manufacturing units,” he said.
Data shows India’s exports of bulk drugs and drug intermediates to Iran at only $0.39 million in April-June 2026, while exports of drug formulations and biologicals stood at $6.31 million.
India’s imports from Iran have increased sharply in the latest quarter, although the rise is heavily influenced by a very low comparison base and an increase in petroleum-product imports.
Provisional data shows India’s imports from Iran rose to $890.32 million in April-June 2026, from $96.41 million in the same period a year earlier.
Petroleum products accounted for $154.37 million of imports, while fresh fruits contributed $21.97 million and plastic raw materials $5.99 million.
The headline increase of more than eight times should therefore be treated cautiously. The previous year’s base was exceptionally low and the rise does not represent a broad-based surge across India-Iran trade.
India once depended heavily on Iranian crude
India was once a major buyer of Iranian crude, importing both light and heavy grades because of their compatibility with Indian refineries and favourable commercial terms.
At its peak, Iran accounted for around 11.5 percent of India’s oil imports, according to Kpler.
That relationship changed after the US tightened sanctions in 2018. India stopped importing Iranian crude in May 2019, replacing those volumes with supplies from West Asia, the US and other producers.
India briefly resumed purchases this year after the US administration allowed a 30-day window for Iranian oil loaded before March 20. Imports reached around 133,000 bpd in April, but Indian refiners stopped buying Iranian crude after the waiver expired.
“India’s direct dependence on Iranian crude is limited today, but its energy security remains closely tied to the Gulf region and the Strait of Hormuz, through which a significant share of its and the global oil trade moves,” Rai said.
That means the latest US sanctions do not immediately remove a major source of crude for India.
Instead, the bigger threat is what happens to the replacement barrels.
Source : Moneycontrol
