Economists see a severe hit to the economy in terms of growth, inflation and consumption demand if crude oil — which crossed $126.4 a barrel this week, the highest since March 2022 — continues to trade higher for longer. Analysts predict that if crude remains above the $110-a-barrel mark for an extended period, FY27 growth may plummet below 6%, the fiscal deficit could widen by 50 basis points, and inflation may shoot past 5%.
ICRA Ratings chief economist Aditi Nayar has mapped three macro scenarios based on crude prices. In the worst-case outcome, she sees growth plunging to around 5% or even lower, with inflation crossing the 5% mark.
“We have worked out three scenarios for FY27 based on crude averaging $85, $105 and $125 a barrel. If crude averages as much as $125 a barrel in FY27, then growth could fall to 5% or lower, and inflation would exceed 5%,” Nayar told TNIE.
She added that the impact on inflation would depend on the extent of pass-through to fuel pump prices, which in turn would affect consumption and growth. However, she did not quantify the demand impact, which had picked up following GST rate cuts last September.
The economy is likely to close FY26 with 7.5% growth and 2.1% retail inflation, while wholesale price inflation stood at a low 0.7%. The current account deficit (CAD) is expected at 0.9% and the fiscal deficit at 4.5%, when crude averaged $71.7 a barrel.
In comparison, if crude averages $85 a barrel, FY27 growth would be around 6.5%. If it averages $105, growth could slow to 5.8%, Nayar said. Inflation in these scenarios would be 4.5% and 4.8%, respectively, while wholesale inflation could be 3.5%, 4.2% and 5% across the three scenarios. CAD is projected at 1.7%, 2.4% and 3.1%, while the fiscal deficit could widen to 4.6%, 4.8% and 5% of GDP, respectively.
Rajni Sinha, chief economist at Care Ratings, expects growth to moderate to 6.7% in FY27 from a pre-conflict projection of 7.2% in the base case, and to dip below 6% in an extreme scenario.
She expects the rupee to average 92–93 in the base case and weaken to around 98 in the extreme scenario.
According to India Ratings chief economist DK Pant, the situation remains highly volatile, making it difficult to offer precise estimates. “Everything depends on how long crude prices remain elevated. A $10 per barrel increase in crude prices would widen the current account deficit by $16.7 billion, and the rest of the variables would adjust accordingly. The inflation impact will depend on the extent of pass-through,” he said.
Emkay Global chief economist Madhavi Arora said crude prices above $100 could lead to a 70-basis-point spike in inflation if fully passed through to retail fuel prices, along with a 50-basis-point hit to the fiscal deficit from FY26 levels.
