Impact of Rising Crude Oil Prices on India
The intensifying conflict between Israel and Iran has led to a significant rise in global crude oil prices, posing potential challenges for India, particularly concerning its current account deficit (CAD) and the rupee.
India's Oil Dependency
- India imports over 85% of its crude oil requirements, making it highly sensitive to global energy-market fluctuations.
- Brent crude prices have increased from $60-61 per barrel in May to about $75 per barrel.
- The Indian crude oil basket rose to $73.1 per barrel as of June 13, from $64 last month.
Macroeconomic Implications
- If oil prices exceed $80 per barrel consistently, it could lead to a 30-40 basis point upward revision in India's CAD forecast for FY26, according to HDFC Bank's Sakshi Gupta.
- Icra's Adit Nayar projects that an average crude oil price of $75 per barrel could widen India's CAD to 1.3% of GDP from 1.1%.
- IDFC First Bank's Gaura Sengupta estimates a CAD of 1.7%, compared to her base projection of 1.5%.
Geopolitical Risks and Diversification
- India stopped importing oil from Iran in 2020, with 35-40% of its oil now sourced from Russia.
- Despite diversification, India remains exposed to risks, as two-thirds of its crude oil and half of its LNG imports pass through the threatened Strait of Hormuz.
Economic Impact and Inflation
- A 25% rise in average crude oil prices could increase India's CAD by 30 basis points as a percentage of GDP, according to Sujan Hajra of Anand Rathi.
- Retail inflation is expected to remain largely unaffected due to government control over petrol and diesel prices, although the wholesale price index may show some impact.
Growth Dynamics
- Current crude oil prices are unlikely to trigger a significant revision in GDP growth projections, noted Nayar, who currently forecasts a GDP growth of 6.2% for FY26.
- A sustained increase in prices could affect corporate profitability and delay private capital expenditure, potentially downgrading GDP growth projections.
Insulation and Forecasts
- Static petrol and diesel prices are expected to protect consumer spending, mitigating GDP growth risks.
- A 20-basis-point dip in real GDP growth and a 70-basis-point rise in retail inflation could occur if crude remains at $81 per barrel for six months, according to Hajra.
Trade Exposure
- India's direct trade exposure to Israel and Iran is limited, reducing direct risks.
- QuantEco Research suggests that as long as Brent prices average below $80 per barrel in FY26, India should avoid significant macrofinancial spillover effects.
