Fueling volatility: India’s energy dependence

Please find below our latest thoughts on India: 

• As geopolitical tensions flare in the Middle East, India’s reliance on imported energy has once again exposed a vulnerability to external shocks.
• Rising oil and gas prices are producing ripple effects across inflation expectations, currency markets, investor sentiment, and equity valuations.
• Oil and petroleum products represent around 26% of India’s overall energy mix, and there is refining capacity to shift away from exports to ensure domestic availability. Within this, though, India is reliant on imported crude oil, meeting 88% of its requirements from abroad, with roughly half sourced from the Middle East.¹
• Natural gas represents a smaller proportion of India’s overall energy requirements at around 11%, yet gas imports tell a similar story - with 60% import dependence and 90% of import needs met by Middle Eastern suppliers. Gas supply shortages have direct implications for household cooking gas prices and agricultural affordability, along with industrial outputs such as power generation and
  petrochemicals.¹
• While India has diversified its oil imports, drawing more from the US and Russia (helped by temporary easing of sanctions on Russian oil), and four Indian-flagged LPG vessels have confirmed passage through the Strait of Hormuz in recent days, price shocks remain disruptive.²
• Every US$1 increase in oil prices raises India’s annual import bill by US$1.8bn. This worsens the trade balance, tightens financial conditions, and ultimately slows real GDP growth.³
• Rising oil prices also raise global risk aversion, and the risk-off environment has lent strength to the US dollar against the Indian rupee.
• Foreign institutional investors (FIIs), sensitive to currency and stock market weakness, have rotated out of Indian equities. In March 2026 alone, FIIs sold US$8.6 billion of Indian equities, amplifying declines in both the rupee and equity markets.⁴
• Against this backdrop, Indian equities have so far been unable to break out of last year’s slump.
• From our perspective, corporate earnings remain the critical variable to watch. Higher energy costs in the near term create headwinds in the form of higher costs of capital and lower margins, and this directly affects the bottom line. 
• Consensus earnings estimates for FY26 have already been revised down on the back of geopolitical developments.
• Having said that, it is easy to lose sight of India’s strong long-term fundamentals during these intensely volatile periods, even though the structural growth drivers remain firmly intact.
• India continues to benefit from a stable political regime, new trade pacts, and strong fundamentals.
• Domestic drivers remain supportive - credit growth is accelerating, policy remains accommodative, local investors remain resilient, and corporate fundamentals are improving.
• Private capital flows continue to favour India with a longer-term view. Gross foreign direct investment (FDI) for 2026 is expected to hit all-time highs. Areas like services, computer software and hardware, telecommunications, and construction remain top sectors for FDI, consistent with the historical
  pattern.⁵
• This divergence between short-term FII portfolio outflows and long-term FDI inflows highlights the difference between cyclical volatility and structural confidence.

• As an emerging market, India has historically experienced periods of elevated volatility around key macroeconomic and geopolitical events. These include national elections, major government reform initiatives like demonetisation, shifts in global trade policy such as US tariff actions, and broader geopolitical tensions. In the end, however, it is the fundamentals that matter most.
• Despite shorter-term headwinds, India has benefited from a prolonged period of relative macroeconomic and political stability, with Prime Minister Narendra Modi now serving a third term. This stability has supported consistent policy direction and improved investor confidence over recent years.
• Periods of heightened volatility often create attractive entry points in high-quality companies where structural drivers remain intact, and we generally approach macro-related volatility with this mindset.

¹ UBS Global Research, India Economic Perspectives: Iran oil shock broadens to gas supply risks, as of 17 March 2026.
²  Reuters, India loads LPG onto stranded empty ships amid gas crisis, as of 24 March 2026.
³ The Economic Times, $50 oil surge could wipe out 2% of India's GDP, warns Axis Bank's Neelkanth Mishra, as of 9 March 2026.
⁴ Citibank, India Macro: BoP, FX and Liquidity Implications of the Middle East Conflict, as of 24 March 2026.
⁵ Department for Promotion of Industry and Trade (DPIIT), as of 30 September 2025.

Back to Blog