The current war between Israel and Iran in June 2025 is rooted in escalating military actions centered around Iran’s nuclear program and broader regional hostilities. The immediate cause was a series of U.S. airstrikes on June 21–22, 2025, targeting key Iranian nuclear facilities, including Fordow, Natanz, and Isfahan, with the stated objective of eliminating what the U.S. and its allies perceive as a nuclear threat from Iran. The U.S. justified these strikes as necessary to prevent Iran from acquiring nuclear weapons, a move strongly supported by Israel.
In response, Iran launched missile and drone attacks against Israel and U.S. bases in the region, including in Qatar and Iraq, framing the U.S. strikes as a violation of its sovereignty and a crossing of a significant “red line”. Israel, for its part, initiated airstrikes across Tehran and other Iranian locations, targeting military and regime-linked sites, and stated these were direct responses to Iranian missile attacks on Israeli territory. The conflict has rapidly escalated, with both sides trading missile and drone strikes, and with Russia expressing support for Iran and condemning U.S. actions.
Underlying these immediate triggers are longstanding tensions over Iran’s support for anti-Israel groups, its ballistic missile program, and Israel’s determination to prevent Iran from becoming a nuclear-armed state. The assassination of senior Iranian military commanders by Israel and Iran’s ongoing support for groups like Hezbollah and Hamas have further fueled hostilities.
In summary, the war was sparked by U.S. strikes on Iranian nuclear sites, followed by Iranian retaliation against Israel and U.S. interests, and subsequent Israeli military responses, all set against a backdrop of deep-seated regional rivalry and nuclear proliferation concerns.
Iran’s nuclear activities and global tension
Iran’s nuclear activities are a central driver of regional tensions in the Middle East for several reasons:
Nuclear Proliferation Fears: Many countries in the region, especially Israel and Saudi Arabia, fear that Iran’s advancement in nuclear technology could eventually lead to the development of nuclear weapons. This concern is heightened by the expiration of key restrictions under previous nuclear agreements, which could allow Iran to expand its nuclear capabilities in the coming years. The possibility of Iran acquiring nuclear arms could trigger a regional arms race, with other states seeking their own nuclear deterrents.
Security Dilemmas and Deterrence: Israel views a potential Iranian nuclear weapon as an existential threat, prompting preemptive strikes and military posturing. Iran, in turn, may see the pursuit of nuclear capabilities as necessary for its own security and as a deterrent against external threats, especially after direct attacks on its nuclear infrastructure. This cycle of threat perception and response increases the risk of military escalation.
Destabilizing Regional Influence: Iran’s nuclear program is intertwined with its broader regional strategy, which includes supporting proxy groups such as Hezbollah and the Houthis. Regional rivals argue that a stronger, potentially nuclear-armed Iran would be emboldened to expand its influence and destabilize neighboring countries.
Erosion of Diplomatic Solutions: Recent attacks on Iranian nuclear sites and Iran’s threats to withdraw from the Nuclear Non-Proliferation Treaty (NPT) have undermined diplomatic efforts and increased uncertainty about Iran’s intentions. If Iran were to exclude international inspectors, the lack of transparency would heighten mistrust and instability.
Potential for Widespread Conflict: The escalation of military actions around Iran’s nuclear facilities has already led to broader regional involvement, with fears that further hostilities could draw in global powers and destabilize energy markets.
Global Economic and Development Impact of the Iran-Israel War
The ongoing conflict between Iran and Israel has sent shockwaves through the global economy, with profound implications for energy markets, inflation, financial stability, and development prospects worldwide.
Energy Markets and Oil Prices
The war has severely disrupted global energy markets, particularly due to threats to the Strait of Hormuz—a critical chokepoint through which about 20% of the world’s oil and a quarter of its liquefied natural gas are shipped.
Israeli strikes on Iranian oil infrastructure and Iran’s threats to close the Strait have already driven Brent crude prices up from $72 to $78 per barrel, with analysts warning that a full closure could push prices to $150 or higher.
Higher oil prices directly raise production costs across sectors such as petrochemicals, plastics, and agriculture, leading to increased consumer prices globally.
Inflation and Global Growth
The surge in energy prices is fueling inflation worldwide, especially in oil-importing economies like India, Japan, South Korea, and European countries that rely on Gulf LNG after cutting off Russian gas.
Oxford Economics estimates that oil prices could reach $130 a barrel in a worst-case scenario, pushing U.S. inflation to nearly 6% by year-end and eliminating prospects for interest rate cuts.
Capital Economics projects that a broader regional war could cut global growth by 0.4% and increase inflation by 1.5%, raising the specter of 1970s-style stagflation.
Financial Markets and Investment
Stock markets have reacted negatively: the S&P 500 and Europe’s STOXX 600 both dropped after Israeli strikes, and regional indices in the Middle East saw even sharper declines.
Increased geopolitical risk has made investors more cautious, with higher insurance and freight costs disrupting supply chains and squeezing profit margins.
The World Bank warns that the conflict could slow Gulf investment inflows in 2025, impacting regional development and capital flows.
Broader Development Impacts
Regional economies face particular hardship, with disruptions to tourism, exports, and foreign investment, as well as pressure on exchange rates in countries like Egypt, Jordan, and Lebanon.
The conflict has led to rerouting of flights and cargo, raising costs and causing thousands of cancellations.
There is concern that a prolonged conflict could trigger a new wave of migration, straining public finances in neighboring countries.
Policy and Central Bank Responses
Central banks, already in an interest rate cutting cycle, now face diminished flexibility due to the risk of an energy price shock.
Governments may be forced to increase defense spending at a time when fiscal space is limited, potentially crowding out development spending.
Impact of the Iran-Israel War on India
The Iran-Israel conflict poses significant risks to India’s economy, trade, and energy security, given India’s deep ties with both countries and the broader West Asian region.
Energy Security and Oil Prices
India relies on the Persian Gulf for over 80% of its crude oil imports, with 60–65% transiting through the Strait of Hormuz—a strategic chokepoint now threatened by the conflict.
Any disruption or closure of this route could severely impact India’s oil supply, drive up global crude prices, and trigger inflationary pressures domestically.
Crude prices have already risen from $64–65 to $74–75 per barrel since the conflict began, and further escalation could push prices even higher, widening India’s current account deficit by an estimated 0.3% of GDP.
Trade Disruptions
Trade with both Iran and Israel is already affected, with Indian exporters holding back consignments due to uncertainty and logistical challenges.
Basmati rice exports to Iran, a major market worth around ₹3,000 crore, have halted as banking channels freeze and port operations are suspended.
Perishable goods like bananas and tea are particularly vulnerable to delays and payment issues, impacting Indian farmers and exporters.
Broader trade with West Asia, including Iraq, Jordan, Lebanon, Syria, and Yemen, is at risk, with Indian exports to the region totaling $8.6 billion and imports at $33.1 billion.
Shipping and Supply Chain Risks
Heightened conflict has increased shipping and insurance costs, especially through the Strait of Hormuz and the Red Sea, leading to rerouting and delays.
Indian companies face higher freight charges, longer transit times, and greater supply chain uncertainty, raising costs for businesses and consumers.
Diplomatic and Strategic Challenges
India must balance its close defense and technology ties with Israel against its historical and economic relationship with Iran, including the strategic Chabahar Port project.
The conflict complicates India’s regional connectivity plans and its broader diplomatic posture, as it seeks to maintain neutrality and safeguard its interests.
Macroeconomic Impact
Rising oil prices and trade disruptions could fuel inflation, weaken the rupee, and strain public finances.
Experts note that while India can absorb moderate oil price increases, a prolonged or escalated conflict could significantly impact growth and development priorities