Why US Sanctions on Iran Could Raise India’s Crude and Energy Costs

The latest US sanctions on Iran have put India’s energy costs and trade channels in focus. While India currently has limited direct exposure to Iranian crude, analysts cited in the source material see the larger risk coming from China competing for alternative oil supplies, potentially tightening global crude markets and raising India’s import bill.

Why China’s response matters for India’s crude costs

China, the biggest buyer of Iranian oil, imported 823,000 barrels per day (bpd) of Iranian oil in July and 534,000 bpd in August, according to data provided by ICRA. If Chinese refiners shift towards Russian crude and other alternative supplies, competition for barrels available to Indian refiners could increase.

The US Treasury announced the latest sanctions on August 24, expanding 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% in the previous session as investors assessed the impact.

The source material also highlights the potential macroeconomic impact. Every $10 per barrel increase in crude prices could widen India’s current account deficit by around 0.3-0.4% of GDP. India imports close to 90% of its crude requirements, making sustained increases in global oil prices a key risk.

Higher crude prices could pressure the rupee and inflation

Brent crude was hovering around $92 per barrel on August 25. It had touched as high as $126/bbl in April amid the West Asia war before falling below $80 after the US-Iran ceasefire was announced in June. Continued regional tensions have since pushed prices higher again.

A sustained rise in crude prices could:

• Increase India’s import bill

• Put pressure on the rupee and current account

• Add to inflation through freight, aviation, manufacturing and other energy-intensive sectors

• Increase pressure on domestic fuel prices

India’s merchandise deficit widened to nearly $32 billion in July 2026 as crude oil and petroleum product imports rose 17.6% year-on-year to $18.31 billion. The government could initially shield consumers from the full increase in petrol, diesel and LPG prices, but this could shift the burden to public finances and oil-marketing companies.

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Can Russian crude offset the supply pressure?

Indian refiners are expected to continue diversifying purchases, including Russian crude where feasible, along with supplies from the Middle East and other regions. However, the source material indicates that Russia may have limited additional volumes available for India.

Russian crude is already supplying roughly 2.5–2.8 mbd, or about half of India’s imports. Higher premiums on Russian crude could therefore raise India’s import bill and worsen pressure on refinery economics, inflation and the current account.

Tighter sanctions could also redirect demand towards suppliers including Russia, Saudi Arabia, the UAE and the US.

Shipping and insurance costs add another risk

India’s exposure is not limited to crude prices. Disruptions to Middle Eastern supply routes could force Indian refiners to source oil from more distant markets, increasing transit times, working-capital requirements, freight and logistics costs.

The source notes that freight rates on key supply routes have risen 137-411% since late February, while war-risk insurance for a single Strait of Hormuz voyage climbed to as high as $7.5-10 million. India also imports as much as 90% of its LPG requirements from the Middle East, widening the potential energy impact of prolonged regional disruption.

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India-Iran trade impact remains limited

Direct India-Iran trade exposure is relatively limited after years of US sanctions, banking restrictions and the loss of Iranian crude as a major Indian import. Total trade stood at $1.04 billion in April-June of FY27, while exports to Iran fell 57.2% year-on-year to $149.38 million. Basmati rice was the largest export item at $103.13 million.

India’s exports of rice to Iran were $109.9 million during April-June 2026. Any prolonged disruption to the UAE-Iran trade corridor could increase freight and payment costs for Indian basmati millers and exporters. Banks, insurers and shipping companies could also become more cautious about Iran-linked transactions.

India’s imports from Iran rose to $890.32 million in April-June 2026 from $96.41 million a year earlier, although petroleum products accounted for $154.37 million and the previous year’s comparison base was exceptionally low.

Conclusion: What does this mean for investors?

The immediate risk for India is not the loss of Iranian crude, since India currently has limited direct dependence on it. The bigger concern is whether China’s search for replacement barrels tightens global oil supplies and pushes crude, freight and insurance costs higher.

India’s exposure to the Gulf and the Strait of Hormuz means investors will need to monitor global crude prices, alternative oil supplies, shipping costs, the rupee and the potential impact on inflation and the current account.