India and emerging economies buckle under Iran war energy import shock

India is bearing the brunt of the Middle East energy shock in ways that equity rallies have masked. PM Modi issued an extraordinary appeal to Indians to cut fuel consumption, limit overseas travel, stop buying gold for at least a year, and return to work-from-home protocols to preserve foreign-exchange reserves. This explicit guidanceCompany-issued forecasts of future financial performance. underscores desperation: the rupee is under sustained depreciation pressure, with forecasts for a break to 98-100 per dollar by year-end. India's current account deficit is widening as oil prices stay elevated, and the nation's gold imports (a key part of household wealth accumulation) drain forex reserves rapidly. Monex Europe expects the rupee to remain under pressure even as the central bank raises rates, because the inflationThe rate at which prices rise across an economy. shock from energy prices outweighs policy tightening benefits.

Other emerging economies are in similar straits. The Philippine peso is weakening on energy import exposure and is likely to fall to new lows despite interest rate hikes. Thailand's largest refiner is diversifying crude sourcing away from the Middle East to Africa and Americas, but this diversification carries freight costs and risks supply chain disruption. Asian currencies broadly have sold off, with the Korean won and Thai baht leading losses as the Strait of Hormuz closure persists. Emerging-market equities have rallied on AI sector enthusiasm (South Korean memory chip stocks, Indian IT services), but this rally masks underlying stress in current accounts and reserve adequacy. JPMorgan raised its Kospi target to 10,000 on semiconductor cycle improvements, but this is contingent on the energy shock not feeding into broader inflationThe rate at which prices rise across an economy. that forces Asian central banks to tighten more aggressively.

The geopolitical overlay is brutalising. China's auto sales fell 21.5% in April after gasoline vehicle deliveries plunged due to the energy shock, with electric car demand insufficiently strong to offset the collapse. India's own automobile sector is facing similar headwinds. Meanwhile, China's private refiners are seeking government approval to cut oil-processing rates after earlier directives to maximize output, signalling that Beijing itself is struggling with the energy economics. Factory inflationThe rate at which prices rise across an economy. in China has hit post-Covid highs, creating a dilemma for the PBOC: raise rates and risk growth, or tolerate inflation and depreciate the yuan (which it has resisted, fixing the currency at 3-year highs ahead of the Trump-Xi summit).

The implication is that emerging markets are experiencing a two-layer inflationThe rate at which prices rise across an economy. shock: direct energy costs and indirect currency depreciation that raises import prices broadly. Central banks are caught between defending currencies and fighting inflation; most are choosing to tighten, which will slow growth. The consensus view that emerging markets offer cheaper valuations and upside leverage to global AI trends is being questioned as energy vulnerability becomes apparent. A sustained spike in oil prices or extended Hormuz closure would force emerging economies into much more severe policy adjustments, potentially triggering capital outflows.