Part 7 of 8 -part series exploring India’s unstoppable growth and the challenges it must navigate

Can Monetary Policy Fuel India’s Growth Admist Global Headwinds

India’s economy is poised for growth in 2025, driven by the Reserve Bank of India’s (RBI) rate cuts and robust domestic demand. However, escalating tensions between Iran and Israel, with the looming risk of a Strait of Hormuz closure, threaten to disrupt this trajectory through surging oil prices. This article analyzes the RBI’s monetary policy against global interest rate trends, its potential to spur growth, and the geopolitical uncertainties arising from the Middle East crisis.

RBI’s Easing: A Growth Engine?

With inflation at a 75-month low of 2.82% in May 2025, the RBI slashed the repo rate by 50 basis points to 5.50%, its third cut since February. This easing aims to boost consumption and investment, supporting India’s projected 6.5% GDP growth for FY 2024-25. Strong GST collections above ₹2 trillion, reviving rural demand, and favorable monsoons bolster this outlook. Yet, the RBI has warned of limited policy space due to global headwinds, particularly energy price risks now tied to the Iran-Israel conflict.

Global Rates: A Cautious Stance

Unlike India, advanced economies face persistent inflation, constraining monetary easing. The U.S. Federal Reserve, despite recent rate cuts, may pause if oil-driven inflation nears 6%. The European Central Bank and Bank of England, grappling with supply chain risks, are similarly cautious, with the BoE’s recent 5-4 policy vote reflecting internal splits. These central banks’ restraint contrasts with the RBI’s flexibility, but global energy shocks could erode India’s advantage.

Iran-Israel Conflict: A Geopolitical Threat

Recent Israeli strikes on Iranian targets and Iran’s retaliatory attacks have pushed Brent crude up 11.2% to $74.1 per barrel as of June 13, 2025. Iran’s threats to close the Strait of Hormuz, through which 20–25% of global oil flows, have heightened concerns.

Probability of Strait of Hormuz Closure

A full closure remains unlikely but not impossible. Iran’s reliance on the Strait for 96% of its oil exports, mainly to China, and its economic constraints deter drastic action. Historical precedents, limited naval capacity, and potential nuclear talks further reduce the risk. Analysts estimate a low probability, but short-term disruptions could drive oil to $80–$90 per barrel, with a worst-case blockade pushing prices above $100.

Timeline for Oil Price Impact

• Immediate (1–2 weeks): Minor disruptions or heightened rhetoric could sustain Brent at $75–$80, with limited impact on India’s inflation.
• Short-term (1–3 months): Prolonged skirmishes or partial Strait restrictions may push oil to $80–$90, raising India’s import costs and inflation by Q4 2025.
• Medium-term (3–6 months): A sustained blockade could spike oil above $100, triggering significant inflationary pressure and forcing RBI policy tightening by Q1 2026.

If the conflict de-escalates within weeks, oil prices could retreat to $65–$70, preserving India’s growth momentum and enabling further RBI easing. This contrast underscores the immense growth potential in a stable geopolitical environment.

Implications for India

India’s 90% oil import dependency, with 40% from the Middle East, makes it vulnerable. Higher oil prices would inflate import bills, weaken the rupee, and pressure inflation, potentially reversing stock market gains (Sensex dropped 573 points on June 13). However, diversified imports from Russia, the U.S., and others, alongside strategic reserves, provide resilience. Stable LNG supplies from Qatar further mitigate risks.

Monetary Policy Outlook: A High-Stakes Balancing Act

The RBI’s easing cycle depends on taming inflation amid Middle East volatility. Rapid de-escalation would keep oil prices in check, allowing sustained rate cuts to fuel consumption and investment, potentially driving GDP growth beyond 7%. However, prolonged conflict or a Strait closure would ignite inflation, forcing the RBI to hike rates and prioritize stability over growth. With global central banks likely to delay easing if energy costs rise, a stronger U.S. dollar could further pressure India’s imports. The RBI must stay nimble, ready to pivot if geopolitical risks escalate, to protect India’s economic ascent.

Conclusion

The RBI’s bold easing can propel India’s growth, but the Iran-Israel conflict looms large. A swift de-escalation unlocks immense potential; a prolonged crisis risks inflation and economic stall. Retail investors should hedge by diversifying into defensive stocks like consumer goods and utilities, allocating to gold or commodities for inflation protection, and holding cash to seize opportunities if markets dip. India’s economic edge hinges on Middle East stability—investors must stay vigilant.