MUMBAI: If crude prices sustain above $80 a barrel, retail inflation could rise by up to 40 basis points, while the current account deficit may widen by 30–50 basis points, economists have warned. A prolonged closure of the Strait of Hormuz could push oil prices further to $90–$100 per barrel. Such a surge would significantly heighten inflation risks and may compel the central bank to tighten monetary policy.
At the last monetary policy review, the Reserve Bank has assumed crude oil basket price to average $70/barrel in fiscal 2026 for its inflation and growth assumptions. The RBI has forecast FY26 CPI at 2.1%, and at 4.1% in H1 of 2027 but if the war lingers on this would have to be revised upwards.
Since the war on Iran began last Saturday crude prices have shot more than 12% and the global benchmark Brent is quoting $80.3 a barrel Tuesday, up 3.3% at 1300 hrs while the Iranian attack on Oman’s LGN facility and the closure of the Strait of Hormuz has led to gas prices in Europe by over 55%.
The Strait of Hormuz through which 20% of the world's crude oil supplies flow each day has come to a standstill as Iran continues to rain missiles and drones across West Asia.
According to economists, if Brent crude sustains above $80 a barrel this can stoke CPI inflation in the country by 20-40 bps provided the prices of crude are passed through to retail prices. The country meets as much as 85% of the crude needs from imports and 45% of the total imports are sourced from the Gulf markets only. So even moderate price spikes can quickly fuel transport cost.
Economists at BMI warned that the long term closure of the Strait of Hormuz can offset the gains from the trade deals and can shave 50 bps off GDP.
“From March onwards, we expect uncertainty to increase sharply in India due to the ongoing conflict in the Middle East. We believe this will discourage investment, offsetting the positive effects from the trade deals on growth. Risks to our outlook are high and two-sided. Iran has issued threats to ships traversing the Straits of Hormuz. Our estimates suggests a full closure of the Straits of Hormuz could directly reduce GDP by up to 0.5 bps through higher energy costs,” analysts at BMI, a Fitch group entity, said Tuesday.
According to Madhavi Arora, chief economist at Emkay Global, for every $1 increase in Brent, the impact of retail price is Rs 0.52/litre on diesel and Rs 0.55/litre on petrol retail prices. This if passed on can upset inflation readings she said without offering a likely actual impact assessment.
But retail prices are unlikely to change with oil marketing companies absorbing the higher costs, say analysts. OMCs remain relatively well cushioned, with earnings from other business segments helping offset oil marketing losses.
"A sharper escalation can push crude towards $90–100, if the Strait of Hormuz is disrupted for longer. This would raise inflation risk materially and can force tighter monetary conditions," said Manoranjan Sharma, chief economist at Infomerics Ratings.
"Higher oil prices act as a tax on net importers as it erodes households real disposable income and raises input costs for transport, aviation, chemicals, fertilisers and several manufacturing segments," Sharma added.
On the impact of crude price spike on current account deficit (CAD), economists say a $10/barrel rise in crude over a year can worsen the CAD by about 30-50 bps of GDP as net oil imports will jump by $13–14 billion.
With crude averaging $80–90 instead of the low‑70s assumption, the CAD could widen from around 1.2–1.3 % of GDP this fiscal and can move even towards 1.5–1.6% if this also leads to more pain for the rupee, they say. In FY27, CAD could average 2% if the war gets into next fiscal.
Additionally, growth is likely to be hit by 15-20 bps if crude prices sustain at $80 in FY27. The finance ministry has forecast growth at 7-7.4% in FY27.
According to Gaura Sen Gupta, chief economist at IDFC First Bank, the impact of rising crude prices will impact the fiscal math only if it leads to a rise in LPG subsidy, decline in PSU dividends, and a potential rise in fertiliser subsidies.