Iran Threatens to Shut Strait of Hormuz: How It Will Impact the Indian Economy and Oil Trade

Iran’s proposal to close the Strait of Hormuz has raised alarms in global energy markets. For India, a country that imports nearly 90% of its crude oil needs, this development carries significant implications. 

Understanding the Strait of Hormuz and Its Importance

The Strait of Hormuz is a vital maritime route connecting the Persian Gulf to the Gulf of Oman and the Arabian Sea. At its narrowest point, it spans 33 kilometres, with just 3 kilometres allocated for traffic in each direction. Nearly 20 million barrels of oil pass through this narrow passage daily, accounting for about 20% of the global oil supply.

Data from the US Energy Information Administration shows that in 2024 and early 2025, the Strait facilitated over one quarter of the world’s seaborne oil trade and one-fifth of total oil and petroleum product consumption. It also serves as a key channel for transporting liquefied natural gas, highlighting its central role in global energy logistics.

What Triggered the Latest Escalation?

The Iranian Parliament approved a proposal to block the Strait following a US strike on Iranian nuclear facilities, state-owned Press TV reported on Sunday, June 22. Although the strike reportedly caused no radioactive fallout, it marked Washington's formal entry into the Iran-Israel conflict. Iran responded with strong warnings and a growing threat to shut down the Strait of Hormuz.

Foreign Minister Seyed Abbas Aragchi stated that Iran has a range of options and would act to defend itself if necessary. Blocking the Strait, which has never occurred before despite previous tensions, now appears to be a real possibility.

Are There Alternative Routes for Oil Transport?

Saudi Arabia and the United Arab Emirates have built overland pipelines to bypass the Strait, but these alternatives cover less than half of its capacity. If the Strait is closed, even temporarily, global oil shipments could face delays and higher costs due to increased transportation expenses and insurance premiums.

This lack of adequate alternatives means that a closure could quickly impact global oil markets and trigger price volatility.

How Dependent is India on the Strait of Hormuz?

India imports approximately 5.5 million barrels of crude oil per day, with close to 2 million barrels passing through the Strait of Hormuz. Over the last few years, India has diversified its oil supply sources. By May 2025, Russian crude, which avoids the Strait entirely, accounted for around 38% of India’s imports, up from under 1% in early 2022.

This diversification has helped reduce exposure, but India is still not fully insulated. Global crude prices influence domestic pricing, and any rise in international oil prices can increase India’s import costs.

What It Means for India and Oil Trade

Oil imports contribute between 15% and 25% of India’s monthly import bill. A disruption in supply or a spike in global crude prices can widen the trade deficit. India’s current account deficit reached 1.3% of GDP in FY25, up from 0.7% the previous year, largely due to higher oil import bills and declining external demand.

Inflationary pressures may increase, and a weaker rupee could further compound the problem. This would limit the government’s flexibility to provide fiscal support, such as subsidies or increased public spending.

The Larger Global Risk and Conflict Spillover

The Strait of Hormuz crisis goes beyond oil. With the US now actively involved, the Iran-Israel conflict could evolve into a broader regional crisis. This would add further uncertainty to global markets and complicate economic forecasting for countries around the world.

Iran’s renewed willingness to escalate and consider a Strait closure marks a strategic shift. Despite years of conflict, Iran has never previously blocked the route, making the current situation more serious.

Read More: Nifty 50 Fell Below 25,000 Mark: Why Indian Stock Market Falling Today?

Conclusion

India’s efforts to diversify energy sources have strengthened its resilience, but disruptions in the Strait of Hormuz remain a significant concern. If the crisis escalates further, it could trigger a global oil shock, strain India’s economy, and add pressure to its currency and trade balance. Policymakers and businesses alike will need to monitor the situation closely as events continue to unfold in West Asia.

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