Rising global oil prices from Israel-Iran conflict pose fresh challenge for India’s economy

By: Shantanu Bhattacharji

If crude prices cross $100 and stay high, the government faces the challenge of controlling inflation, supporting growth, and maintaining fiscal discipline simultaneously—a tough balancing act with little room for error.

The economy has been on a roll—growth is strong, inflation is in check, and the Reserve Bank of India (RBI) was expected to begin easing rates later this year. But rising oil prices may upend that narrative. 

Following coordinated America and Israeli strikes on Iranian nuclear facilities over the weekend, global oil markets flared up. Brent crude climbed nearly 2 per cent to $78.53 a barrel, and West Texas Intermediate (WTI) crossed $75. This may just be the start. If tensions in the Middle East escalate, analysts warn Brent could breach $100—and possibly test $120. 

India, which imports over 85 per cent of its crude oil, the implications are immediate and far-reaching. 

Inflation, Reignited 

The first and most visible impact is on inflation. Expensive oil doesn't just hit petrol pumps—it ripples through the entire economy. Higher fuel costs raise transportation expenses, which inflate prices of food, consumer goods, and manufacturing inputs. 

The central bank currently expects headline inflation to average 3.7 per cent in FY26. But a sustained rise in oil prices could push that figure closer to—or even beyond—the upper bound of the RBI’s 2–6 per cent comfort zone. This could derail hopes of rate cuts and force the RBI to stay cautious, or even tighten policy, just when the economy needs support. 

Trade Imbalance at Risk 

A sharp rise in crude prices also threatens to widen the current account deficit (CAD). If oil climbs 25 per cent from current levels, the import bill could jump by $30–40 billion (Rs 2.5–3.3 lakh crore). That would weaken the rupee, drain foreign exchange reserves, and make the country more vulnerable to volatile global capital flows. 

In FY24, the trade deficit was already under pressure due to surging gold and electronics imports. With costlier oil added to the mix, the country’s external position could begin to look fragile again—especially in the eyes of foreign investors. 

Fiscal Headwinds 

The Centre has been working toward fiscal consolidation, targeting a deficit of 5.1 per cent of GDP in FY26 and under 4.5 per cent by FY28. But oil could derail that path.

If the government chooses to cushion consumers through excise duty cuts or fuel subsidies, revenues will take a hit. If it passes on the cost, political backlash could follow—particularly in a year packed with assembly elections. Either option narrows the fiscal room to manoeuvre. More borrowing could drive up yields and crowd out private investment, tightening financial conditions at the worst possible time. 

Strategic Vulnerabilities 

India’s energy diplomacy will also face fresh tests. Over the past two years, New Delhi has leaned heavily on discounted Russian oil to reduce its import bill. But the bigger threat now lies in the Strait of Hormuz—a chokepoint through which nearly one-third of India’s daily oil imports (around 2 million barrels) pass.

If Iran makes good on its threats to disrupt shipping, the impact would be swift and severe, both in terms of supply disruptions and price spikes. This highlights India’s continued exposure to external shocks, despite recent progress in diversifying energy sources. 

A Narrower Path Ahead 

India’s fundamentals are stronger than during previous oil shocks. Inflation is more stable, reserves are larger, and the rupee is relatively resilient. But the economy remains deeply oil-dependent. 

If crude prices cross $100 and stay elevated, the government will be forced into a delicate balancing act—taming inflation, sustaining growth, and sticking to fiscal discipline—all at once. It’s not an impossible task, but the margin for error is shrinking fast.