As the US-Iran-Israel conflict extends into its second month with no end in sight, India’s economic impact goes beyond oil price spikes and market volatility. The financial system is quietly absorbing the shock, with risks building beneath the surface. The real threat is delayed, cumulative stress that could emerge in coming quarters as liquidity tightens and cash-flow pressures affect asset quality.

An EY India analysis highlights that rising freight costs, insurance premiums, trade finance disruptions, and strained supply chains are reshaping cost structures and stretching liquidity across sectors. War risk premiums in shipping, aviation, and trade credit have surged 40-50%, while crude price swings and a weakening rupee are pushing up input costs.

Sectors directly exposed—oil, aviation, logistics, petrochemicals, and import-heavy trade—are already facing margin compression and liquidity strain. This stress is beginning to spread to MSME manufacturing, auto parts, cement, and consumer durables, where higher costs coincide with weaker demand. Much of the strain is hidden beneath the surface. Banks see early signs in cash-flow behavior rather than defaults, challenging traditional risk models. Export-oriented MSMEs, particularly apparel firms, face margin compression and longer cash cycles, which often escape standard risk detection.

Over time, stress spreads further: supplier payments get delayed, anchor firms stretch payouts, and local employment is disrupted. Household incomes, especially among urban lower-middle-class segments, are also under pressure from inflation and technology-driven job changes, causing irregular salary credits and shrinking balances—early indicators of rising delinquencies. Unsecured and small-ticket retail loans may experience delayed but sharper asset-quality deterioration.

Trade finance is an additional constraint, as shipping disruptions and stricter sanctions slow cross-border payments, tying up working capital. With 35-40% of India’s $138 billion remittances coming from the Gulf, any slowdown there could amplify risks. Insurance premiums for marine, aviation, and trade credit are already rising in response. While the financial system seems stable for now, EY warns that underlying liquidity, cash-flow, and income stresses could manifest later as deterioration in asset quality, making anticipatory risk management crucial.