Middle East Crisis: What Happens To India If Oil Persists At $100 Per Barrel?

Amid the ongoing Middle East crisis if the crude oil prices persist at $100 India's current account deficit (CAD) could widen to 2% of GDP from1% at$70 per barrel.

The ongoing Israel-US-Iran war has already intensified Asia's energy crisis and caused global supply chain disruptions, especially in the Strait of Hormuz.

"Prolonged Strait of Hormuz (SOH) interruptions beyond mid-March, delayed energy supply normalization from affected producers, and persistent uncertainty could strain India's external sector, spilling over into the domestic economy and fiscal pressures," according to investment bank Elara Capital.

$100 Per Barrel Crude Oil Price: Key Concern Areas For India

"USD-INR could weaken further to 94- 95, while the Centre's annual additional expenditure would rise by INR 3.6n/annually," it noted.

Meanwhile, elevated urea phosphate and gas prices would also push up fertilizer subsidies "higher by Rs 200 billion due to stock replenishment needs.

Each additional month of conflict with oil near USD 100/bbl adds INR 300bn to the Centre's fiscal cost (covering OMC losses). Second-order effects include reduced tax collections from growth shocks.

Elara Capital noted that while a month-long crisis seems 'manageable via internal buffer, prolongation risks a capex pullback'.

"Remittances bear monitoring as GCC countries' account for~38% of inflows (RBI Survey 2023-24). Upside CAD risks could push USDINR toward 94-95," it said.

Also Read: LPG Crisis: Bengaluru Protests, Mumbai Menu Cuts as Supply Hits Hotels

Oil Price Volatility: The Impact On India's Inflation

On the inflation front, upside risks emerge not only from oil prices, but also from gas, chemicals, and overall supply chain disruptions. Our models indicate a lpp rise in overall commodity prices add 0.22pp to WPI-based inflation.

The pass-through to retail prices is complicated-if we assume OMC and excise duty cuts absorb the rise in crude prices and the government extends subsidies, the upside in CPI would be minimal.

"We expect a 14bp upside in CPI inflation in the near term, due to retail LPG price hike of INR 60/cylinder. If government does not hike LPG subsidy, an increase of INR 592/142 kg cylinder would be needed, leading to a 140bp upside to CPI inflation," the Gurugram-headquartered investment bank noted.

Similarly, if the "government decides to hike petrol and diesel prices to offset under- recoveries and not cut excise duty we are looking at a direct impact of 70hp on CPI," it said.

Impact On Central Government Finances

On the fiscal front, under-recoveries of OMC at “USD 100/bbl crude are Rs 11.8/L for gasoline and Rs 14/L for diesel.”

"If we assume government offsets this loss via excise duty cuts, we expect a revenue shortfall of Rs 2.1tn. A subsidy cost of Rs 1.5tn will be added in the form of LPG subsidy if the government absorbs the entire under-recovery of LPG," it added.

Impact On FY27 Growth

Given the exogenous nature of the energy shock, the combined impact of first and second orders presents a downside risk of a full percentage point to "FY27E growth of 7.2% YoY."

Meanwhile, domestic spillovers are likely to surface if the energy shock is passed on to consumers and producers, leading to demand erosion, compounded by the RBI holding rates for a prolonged period facing potential inflationary surge.

The RBI Trilemma

India's apex bank is expected to prioritize "inflation anchoring and currency stability over stance of supporting growth."

If oil persists at USD 100/bbl, the central bank is likely to maintain a hawkish stance to prevent a sharp INR depreciation and buildup defence against the resultant "imported inflation" shock.

According to Elara Capital's forecast, a 5% rise in CPI in HZFY27E is expected once the adverse base kicks in and food prices see an uptick, due to potential El Nino conditions.

"We see the RBI prioritizing liquidity management via bond purchases to limit growth shock and anchor benchmark yield. This proactive intervention is crucial in our view, if a prolonged conflict exerts upward pressure on sovereign risk premium," it said.