Even though it may be too early to draw firm conclusions, the Indian economy—otherwise in a sweet spot—is staring at the possibility of an inflation flare-up, a weakening rupee, a widening current account deficit, and growth losing steam due to the sharp jump in crude oil prices driven by the Middle East crisis.
Brent Crude prices have surged more than 30% since the combined attack of the US and Israel on Iran on February 28. On Friday, March 6, Brent Crude surged nearly 9% to 93.04 per barrel.
Indian stock market investors have reasons to worry.
Crude oil and the Indian economy
India is the world’s third-largest importer of crude oil. According to economists, it imports about 85-90% of its crude oil requirements, and every $1 increase in the per barrel price of crude oil raises the country’s import bill by roughly ₹16,000 crore.
Even though a short-term spike in crude oil prices may not be significantly negative for the Indian economy, a prolonged period of elevated crude oil prices can inflate the country’s import bill, weaken its currency, drive up inflationary risks, and accelerate foreign capital outflow.
“The higher crude oil prices, if they persist beyond a few weeks, will weigh on the current account deficit through higher oil imports, supply disruption on gas, fertilisers, and other inputs and trade with the Gulf countries. INR (Indian rupee) will come under significant pressure as FPIs (foreign portfolio investors) outflows may worsen,” Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, explained.
Bhardwaj underscored that higher input prices and weaker INR would weigh on the otherwise benign inflation outlook, keeping the MPC on edge. Much of the impact, however, will depend on the longevity of the crisis and the policy measures taken to offset these concerns.
Can inflation shoot up?
The trajectory of inflation will depend on how long the war continues and the response of policymakers to the rise in oil prices.
Madhavi Arora, Chief Economist for Emkay Global Financial Services, told Mint that if the conflict continues beyond a month, the pressure on OMCs (oil marketing companies) will increase significantly. They may not be able to bear the entire burden for long.
If the situation subsides within a month, policymakers may try to absorb the temporary shock through policy measures. But if the conflict drags on, the government may eventually have to allow some pass-through of higher crude prices to consumers.
In that scenario, Arora said, the inflation impact will depend on how much of the cost increase is reflected in fuel prices.
Arora pointed out that risk aversion during geopolitical conflicts typically pushes gold prices higher, which can feed into inflation. Around 40% of India’s fertiliser imports come from regions affected by geopolitical tensions, so supply disruptions could raise costs.
Moreover, economic disruptions in the Gulf region could impact remittance flows to India.
“The impact is not limited to oil prices alone—it extends to multiple sectors of the economy,” Arora said.
According to Manoranjan Sharma, Chief Economist at Infomerics Ratings, for India, which imports nearly 88% of its crude, sustained prices above $80 per barrel could push inflation toward the upper end of the RBI’s 2–6% target band.
Sharma believes that for the Indian economy, the impact could be moderately negative but manageable if the shock is temporary.
Sharma said growth could slow slightly as consumption and investment soften. But at this juncture, India’s strong forex reserves, diversified oil sourcing, and relatively resilient domestic demand help cushion the debilitating macroeconomic impact.
Can RBI raise rates in the coming policy meeting?
It could be too early to say that. At the moment, the impact of rising crude oil prices on retail inflation is still uncertain. Moreover, there is no clarity on how the burden will be distributed across different stakeholders.
Arora highlighted that right now, the burden is largely being absorbed by the OMCs, which have not passed on higher crude prices to consumers through pump prices.
“Because petrol and diesel prices have been largely frozen, the immediate impact on retail inflation may not be significant. From a CPI perspective, the direct inflation impact may remain manageable in the near term,” said Arora.
Sharma pointed out that historically, a $10 increase in crude adds about 0.2–0.4 percentage points to CPI inflation through higher fuel, transport, and input costs.
“The RBI may be forced to delay rate cuts or even adopt a tighter stance if second-round inflationary pressures emerge,” said Sharma.
Should investors worry?
The US-Iran war and the consequent rise in crude oil and fertiliser prices may force the government to increase subsidies on fuel or fertilisers. That would limit fiscal space and could affect growth-oriented spending.
Additionally, higher crude prices can push up input costs for companies, especially in sectors dependent on energy, logistics, and petrochemicals. This would affect corporate margins.
Moreover, there could also be a direct impact on wholesale inflation (WPI) because energy and transportation costs will rise.
Experts say market sentiment will depend on how long the conflict lasts and how severely it disrupts global energy supplies.
“If the disruption to oil and gas supply is limited, markets may eventually adjust. We saw something similar during the Russia–Ukraine conflict, when crude prices briefly surged above $120 per barrel but markets later stabilised,” Arora told Mint.
“However, if the conflict leads to prolonged supply disruptions or higher logistics costs, it could negatively affect corporate earnings and economic growth,” she added.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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