A prolonged political turmoil in Middle Eastern countries, led by Egypt, may further deteriorate India's current account deficit and dent investment flows to emerging markets, Citi said in a research note on Monday.
The crisis in Egypt could result in oil prices trending higher, which will impact India's already deteriorating current account deficit, leading to higher subsidies and inflation, analysts Rohini Malkani and Anushka Shah wrote.
India's current account deficit in the September quarter widened to a record high of $15.8 billion as booming domestic consumer demand sucked in imports and service sector exports suffered from weak global demand.
Events in Egypt will have an impact on Indian monetary policy, the country's central bank deputy governor said on Sunday, underscoring the worries about headline inflation above 8.4 per cent.
India's economy, Asia's third-largest and a driver of the world recovery, is expected to grow 8.6 per cent in the year ending in March, but at the risk of high commodity prices widening the trade gap and exacerbating inflation.
The Reserve Bank of India (RBI) has increased its end March inflation forecast to 7 per cent from the earlier 5.5 per cent.
The central bank has raised rates seven times since March, although monetary policy is expected to have only a limited impact on reining in supply-side driven food inflation.
The turmoil in Egypt has raised concerns of a disruption to supply of Middle East oil shipped through Egypt, and of unrest spreading across the Middle East and North Africa, which combined produce more than a third of the world's oil.
North Sea Brent crude oil futures jumped back above $100 on Monday.
The Middle East accounts for more than half of India's remittances of $52 billion and is also India's largest export market, the Citi report said.