Examine the linkage between geopolitical conflicts in the Middle East and India's macroeconomic indicators such as inflation, current account deficit and bond yields.

Q. Examine the linkage between geopolitical conflicts in the Middle East and India's macroeconomic indicators such as inflation, current account deficit and bond yields. (15 marks, 250-350 words)

West Asia supplies the bulk of India's crude and LPG, so conflict there is not a distant security event but a domestic macroeconomic shock. Diversification has helped — about 70% of crude imports are now routed outside the Strait of Hormuz, against roughly 55% earlier [1] — yet the transmission chain remains intact.

Middle East conflict → supply/shipping risk → crude & freight costs ↑
   → rupee depreciation → inflation ↑ → rate-tightening expectations
   → bond prices ↓ / yields ↑ → borrowing cost & fiscal deficit ↑
        Fig: Oil-shock transmission to India's macro indicators

Impact on inflation - Fuel is a universal input; costlier crude raises transport, freight and manufacturing costs, feeding core inflation. - Currency weakness makes the shock worse; the Economic Survey 2025-26 flags imported inflation from currency depreciation as a risk even as retail inflation fell to 1.7% (April–December 2025-26) [2]. - Households are directly exposed: India imports about 60% of its LPG, of which nearly 90% transits the Strait of Hormuz [1].

Impact on the current account deficit - Crude is India's single largest import; price spikes plus higher war-risk insurance and freight widen the trade gap. - CAD stood at 0.8% of GDP in H1 2025-26, cushioned by services exports and remittances [2] — but Gulf remittances are themselves hostage to regional stability.

Impact on bond yields - Markets price in inflation and tighter money, so G-Sec prices fall and yields rise (inverse relation) [3]; RBI research confirms global factors significantly move 10-year yields, with a 1% rise in G-Sec supply lifting long-term yields by 9.5–10 bps [4]. - Costlier borrowing strains the sub-4.5% fiscal deficit path [2]; the RBI, as debt manager under the RBI Act, 1934, uses OMOs to smooth volatility [3].

Thus a single geopolitical spark travels from the Gulf to India's price level, external balance and debt market. Sustained insulation lies in deepening supplier diversification, Strategic Petroleum Reserves, ethanol blending and renewables [5], backed by proactive energy diplomacy — converting external vulnerability into durable energy security.

(~325 words)

Sources: 1. PIB — Inter-Ministerial Briefing on Recent Developments in West Asia (2026) — 70% of crude routed outside Strait of Hormuz (vs ~55% earlier); LPG import and Hormuz-transit shares 2. PRS Legislative Research — Economic Survey 2025-26 summary — CAD at 0.8% of GDP in H1 2025-26; retail inflation 1.7%; imported inflation risk; fiscal deficit target below 4.5% of GDP 3. RBI — Government Securities Market in India: A Primer — inverse bond price–yield relation; RBI as public debt manager under the RBI Act, 1934, and OMOs 4. RBI Bulletin — determinants of 10-year G-sec yields — global and domestic drivers of yields; supply–yield elasticity of 9.5–10 bps 5. PIB — Steps by Government to Reduce Import Dependency on Crude Oil — diversification, strategic reserves, ethanol blending and alternative energy measures