How to Control Rising Inflation Amid Hormuz Closure: A Case for South Asian States

The Strait of Hormuz closure has unleashed the largest oil supply shock in history. Here’s how India, Pakistan, and Bangladesh can control rising inflation—and why the crisis is a structural wake-up call.

Something shifted in the world economy on February 28, 2026—and it is not coming back anytime soon.

When U.S.-Israeli strikes on Iran triggered the closure of the Strait of Hormuz, the world did not merely lose a shipping lane. It lost the circulatory artery of the global energy system. Tanker traffic through the strait—which ordinarily handles roughly 20% of global seaborne oil and a quarter of global LNG—collapsed from approximately 130 vessels per day in February to a near-standstill of just 6 in March, a 95% plunge almost without historical precedent. The International Energy Agency called it “the largest supply disruption in the history of the global oil market.” That is not hyperbole. That is a policy emergency.

For South Asia, the shock arrived like a tax bill no one budgeted for. Fuel queues snaked around petrol stations from Karachi to Chittagong. LPG cylinders vanished from market shelves in Lahore and Dhaka. Transport operators in Mumbai began passing surcharges onto consumers already squeezed by food prices. Small manufacturers—the backbone of South Asian employment—watched input costs spike while their customers pulled back. And everywhere, the question was the same: How long can governments hold the line?

The answer depends entirely on whether South Asian leaders treat this crisis as a temporary weather event requiring familiar relief measures—or as a structural indictment of a chronic, self-inflicted energy vulnerability that has been deferred for too long.

The Transmission Mechanism: How Hormuz Disruption Fuels South Asian Inflation

Understanding the inflation problem requires mapping the transmission chain from a narrow waterway in the Persian Gulf to a vegetable vendor’s stall in Dhaka.

The first channel is direct energy costs. Physical Dated Brent crude—the price Asian importers actually pay for delivered cargoes—surged to $132 per barrel in early April, even as futures markets drifted back to the low-$90s on ceasefire speculation. The gap between the futures price and the physical price tells you everything: markets believe the crisis will eventually resolve, but the cargo sitting in a tanker outside the Gulf cannot wait for resolution. For every $10 sustained increase in oil prices, global inflation rises by approximately 0.2–0.25 percentage points—a rule of thumb that becomes brutally consequential when prices jump $40 or $50.

The second channel is fertilizer. Up to 30% of globally traded fertilizers—urea, ammonia, and phosphates—transit the Strait of Hormuz. The Persian Gulf accounts for roughly 30–35% of global urea exports. With the strait closed, fertilizer prices in South Asia have spiked sharply, arriving precisely when planting seasons begin. This is not merely an economic problem. It is a food security crisis in the making, as higher fertilizer costs translate directly into lower crop yields and higher food prices in societies where food already commands 40–50% of household expenditure.

The third channel is currency depreciation. As investors pulled capital from emerging markets, the Pakistani rupee, Bangladeshi taka, and Sri Lankan rupee all faced renewed downward pressure. A weaker currency means costlier imports—denominated in dollars—feeding exchange rate pass-through into domestic prices. For Pakistan, navigating an IMF programme with thin foreign exchange reserves, this is the most dangerous second-order effect.

The fourth channel is LNG and power generation. After Iran struck Qatar’s Ras Laffan LNG complex in March 2026, northeast Asian LNG spot prices more than doubled to $22.5 per MMBtu. Bangladesh—which pivoted aggressively toward LNG-fired power in recent years—found its generation economics upended overnight. Pakistan, already mired in circular debt in its energy sector, faces similar pressures.

The IMF’s April 2026 World Economic Outlook now anticipates global inflation rising to 4.4%—up 0.6 percentage points from January projections—while global growth is expected to slow to 2.6% in 2026 from 2.9% in 2025. UNCTAD warns that developing nations face the ‘dual whammy’ of higher prices and weakening currencies simultaneously constricting their capacity to respond.

South Asia’s Structural Vulnerability: The Price of Chronic Dependence

Compared with economies most insulated from this shock—the United States, which exports energy; or China, which held approximately 1.2 billion barrels of crude reserves as of early 2026, providing over 100 days of import cover even under a scenario of zero new inflows—South Asia stands nakedly exposed.

India sources 40–50% of its crude imports via the Strait of Hormuz under normal conditions. Japan and South Korea—commonly cited as the most structurally vulnerable large Asian economies—at least benefit from decades of investment in strategic petroleum reserves exceeding 100 days of import cover, IEA membership, and deep institutional frameworks for crisis response. South Asian states, broadly, have none of these advantages at scale.

Pakistan immediately requested that Saudi Arabia reroute crude shipments through the Red Sea port of Yanbu—a pragmatic emergency measure, but illustrative of just how thin Pakistan’s contingency infrastructure has become. Bangladesh, among the most price-sensitive importers in Asia, faces fuel shortages that threaten to cascade through its garment sector—the country’s principal export earner and employer.

What makes South Asia’s position particularly precarious is the coincidence of vulnerabilities: high energy import dependence, thin fiscal buffers, food systems reliant on fertilizer imports, large informal workforces with no safety nets, and governments facing political pressure to cushion consumers precisely when doing so most strains public finances.

The Subsidy Trap: Why the Obvious Answer Is the Wrong One

Let us be clear-eyed about one temptation that will prove costly: using broad-based fuel subsidies as the primary response to this crisis.

Subsidies are politically seductive. They provide immediate, visible relief. They suppress headline inflation statistics in the short run. But the record is damning. Pakistan’s history of energy subsidies has contributed materially to its recurring fiscal crises, its addiction to IMF programmes, and the circular debt spiral that has made its power sector a structural liability rather than an asset. India’s fertilizer and fuel subsidy bill already runs into the hundreds of billions of rupees annually; adding another layer during an oil shock without structural reform merely postpones pain while accumulating fiscal dry tinder.

Subsidies also suppress the price signals that tell businesses and consumers to adapt—to shift to public transport, to invest in more efficient machinery, to explore renewable alternatives. The right model is targeted, time-bound support for the genuinely vulnerable—low-income households, small farmers, critical transport workers—combined with demand management measures across the broader economy.

A Framework for Controlling Inflation Amid the Hormuz Closure

Short-Term Measures: Absorbing the Shock (0–6 months)

• Strategic reserve management. India, having diversified its crude sources to over 41 suppliers and pivoted to Russian crude since 2022, received a U.S. Treasury emergency waiver in March 2026 permitting purchases of stranded Russian oil cargoes—a pragmatic lifeline. Other South Asian states should immediately inventory available reserves and coordinate drawdowns with transparency to avoid hoarding.
• Emergency import diversification. Pakistan’s request for Saudi rerouting via Yanbu is the template, not the ceiling. Bangladesh, India, and Sri Lanka should activate emergency procurement with suppliers in West Africa (Nigeria, Angola), the Americas (Colombia, Brazil, Ecuador), and the United States, whose LNG export capacity is insulated from the Hormuz disruption.
• Demand-side management. The IEA’s crisis guidance recommends remote working, reduced highway speeds, carpooling mandates, and optimised public transport. The Philippines has moved to a temporary four-day work week. South Asian governments should adopt contextually adapted equivalents—calibrated demand reduction that cuts import bills without destroying economic activity.
• Targeted cash transfers over blanket subsidies. Channel relief directly to low-income households through digital payment infrastructure (India’s JAM Trinity, Bangladesh’s mobile money networks). Protect purchasing power without distorting price signals economy-wide.

Medium-Term Measures: Reducing Structural Dependence (6–24 months)

• Accelerated crude and LNG source diversification. No South Asian state should source more than 25–30% of any single energy commodity from a single supplier corridor. Long-term offtake agreements with U.S. LNG exporters, African crude suppliers, and Central Asian pipeline sources should be treated as national security imperatives.
• Regional energy cooperation. The BIMSTEC framework offers mechanisms for South Asian states to share strategic reserves in crisis conditions, coordinate procurement for scale advantages, and develop regional transmission infrastructure. Nepal and Bhutan’s hydropower potential remains dramatically underutilised as a clean regional resource.
• Fertilizer production localisation. India and Pakistan have domestic natural gas resources that could be more systematically directed toward domestic urea production, reducing the 30%+ import dependence on Gulf fertilizer. Bangladesh should explore accelerated investment in domestic blended fertilizer formulations.

Long-Term Measures: Achieving Energy Sovereignty (2–10 years)

• Aggressive renewable energy scaling. India already targets 500 gigawatts of renewable capacity by 2030. The Hormuz crisis makes this not merely an environmental imperative but an economic security imperative. Every gigawatt of domestic solar or wind capacity installed is a barrel of oil not imported, a dollar of foreign exchange not spent, an inflation point avoided in the next supply shock.
• Energy efficiency and building codes. Mandatory efficiency standards for appliances, commercial buildings, and industrial processes can materially reduce electricity demand growth without reducing welfare—and should be treated as a structural inflation-control mechanism.
• Fiscal buffers and sovereign energy funds. South Asian states should consider establishing dedicated Energy Security Funds—capitalised during periods of lower oil prices—to finance strategic reserve acquisitions and energy transition investments without straining general budgets during shock periods.

The Geopolitical Dimension: South Asia Needs a Seat at the Table

The Hormuz crisis is ultimately a geopolitical crisis. And South Asian states—which between them represent nearly two billion people and some of the most oil-import-dependent large economies on earth—have historically been bystanders in the geopolitical conversations that determine their energy fates.

India, as the region’s largest economy and a G20 member, should use every diplomatic channel to advocate for Hormuz stabilisation, including through its traditionally non-aligned posture and its relationships with Gulf states, Russia, and the United States. Delhi should also push for South Asian integration into IEA-style emergency response frameworks—a conversation that has inched forward in recent years but has yet to produce binding mechanisms.

Pakistan, Bangladesh, and Sri Lanka should coordinate through the UN, UNCTAD, and the Commonwealth to ensure the international community’s crisis response includes adequate support for vulnerable energy-importing developing nations. The IMF and World Bank have signalled awareness of this imperative; South Asian governments must turn awareness into concrete concessional financing for energy security investments.

The Crisis That Could Change Everything

The Strait of Hormuz has always been South Asia’s Achilles’ heel. What has changed in 2026 is that the vulnerability can no longer be politely deferred.

UNCTAD’s assessment is unambiguous: regions more dependent on Middle East energy imports, particularly South Asia and Europe, will be more exposed to prolonged inflationary pressure if disruptions persist. The SolAbility modelling estimates cumulative GDP losses of 3–4% or more under prolonged closure scenarios, with South Asia absorbing some of the heaviest hits. These are not tail risks. They are baseline scenarios under conditions that show no imminent resolution.

The history of structural economic reform tells a consistent story: the deepest, most durable reforms happen under crisis conditions, when the political economy of inertia is finally overwhelmed by the political economy of necessity. The 1991 Indian reforms came on the back of a balance-of-payments crisis. Bangladesh’s garment sector rise came out of disciplined liberalisation under pressure. Pakistan’s most consequential fiscal adjustments have invariably come under IMF conditionality.

The 2026 Hormuz closure can be South Asia’s next inflection point—but only if leaders resist the narcotic of temporary relief and reach instead for structural transformation.

The strait may reopen. The lesson must not close with it.

Key Sources & Citations

• IMF Blog: How the War in the Middle East Is Affecting Energy, Trade, and Finance (March 2026)

• UNCTAD Rapid Assessment: Hormuz Disruption Deepens Global Economic Strain

• Bloomberg Economics SHOK Model – Hormuz Oil Shock Analysis

• IMF Regional Economic Outlook: MENAP, April 2026

• World Economic Forum: 6 Ways Countries Are Responding to the Historic Energy Shock

• IG Markets: Strait of Hormuz Closure – Implications for Asia

• SolAbility: Hormuz Economic Impact Model – Day 42 Update

• Al Jazeera: IMF Cuts Global Growth Forecast During Hormuz Blockade

• Wikipedia: 2026 Strait of Hormuz Crisis

• Allianz Research: Economic Outlook 2026–27 – The Fog of War