THE IMPACT OF THE USA–IRAN CONFLICT ON INDIA'S FINANCIAL SYSTEM: THE ROLE OF OIL PRICES AND EXCHANGE RATE VOLATILITY

Abstract

Geopolitical conflicts have become significant external shocks influencing global economic stability and financial markets. Among these, the ongoing tensions between the United States and Iran have repeatedly disrupted international crude oil markets, leading to increased price volatility and uncertainty. As one of the world's largest crude oil importers, India remains particularly vulnerable to fluctuations in global oil prices, which subsequently affect exchange rates, inflation, capital flows, and overall financial system stability. This study examines how the USA–Iran conflict is transmitted to India's financial system through changes in crude oil prices and exchange rate volatility. The study adopts a quantitative, descriptive, and analytical research design based entirely on secondary data collected from reliable sources, including the Reserve Bank of India (RBI), Ministry of Petroleum and Natural Gas, International Monetary Fund (IMF), World Bank, National Stock Exchange (NSE), and other publicly available databases. Annual and quarterly data covering the period from 2020 to 2026 are analysed using trend analysis, descriptive statistics, correlation analysis, and regression techniques to examine the relationships among geopolitical events, Brent crude oil prices, the INR/USD exchange rate, inflation, and selected financial market indicators. The findings indicate that periods of heightened USA–Iran geopolitical tension are generally associated with increases in global crude oil prices and greater exchange rate volatility. Rising oil prices contribute to the depreciation of the Indian Rupee, increase imported inflation, and create uncertainty in financial markets, thereby affecting overall financial stability. The study highlights the importance of strengthening India's energy security, maintaining adequate foreign exchange reserves, diversifying crude oil import sources, and implementing prudent monetary and fiscal policies to reduce vulnerability to external geopolitical shocks. The research contributes to the growing literature on geopolitical risk transmission and provides practical policy implications for government authorities, financial institutions, and investors seeking to enhance economic resilience against global uncertainties.