Oil Shock Drives Inflation Risk in India as Middle East War Disrupts Supply

Rising oil prices and supply problems linked to the Iran war are clouding India's economy. India imports about 90% of its crude oil and is the third largest oil buyer globally.

The war has blocked the Strait of Hormuz. Nearly one fifth of global oil and gas moves through this path.

  • India's oil and gas import bill jumped 53% in April
  • Global crude prices surged to nearly $120 per barrel after February 28
  • Prices stay about 30% higher than before the war
  • Natural gas prices rose 75%
  • The RBI expects inflation to average 5.1% in FY27, up from 3.48% in April
  • Economists project growth will slow to 6.6% from 7.7% last year

Economists warn long lasting tensions threaten to raise inflation, slow growth, and hurt government finances. Michael Langham is an economist at Aberdeen Investments. He said India faces a series of supply shocks. He added the Reserve Bank of India will find it hard to ignore the energy shock.

The outlook has shifted since late last year. RBI Governor Sanjay Malhotra then called the economy a rare Goldilocks phase with easing inflation and strong growth.

The government and the RBI have acted to support the rupee and foreign exchange reserves. Officials have also limited gold imports and urged citizens to limit foreign travel and use more public transport.

HSBC said the RBI's latest measures would limit damage. The bank had expected India's balance of payments deficit to hit $65 billion in 2026-27. It now estimates the measures would improve the balance by $30 billion. The deficit stood at $25.2 billion in 2025-26.

India has delayed passing higher import costs to consumers. Petrol and diesel prices have risen less than 10% since February 28. Other Asian oil importers raised prices by 50% or more.

The government has cut taxes on petrol and diesel. This costs about Rs 140 billion in monthly revenue. A government official said fertiliser subsidy spending will rise 20% in 2026-27.

The Centre has budgeted for a fiscal deficit of 4.3% of GDP this year. A Reuters poll forecast the deficit will widen to 4.7%. Some economists project it will approach 5%.

Sat Duhra is a portfolio manager at Janus Henderson Investors. He said India faces structural challenges in foreign direct investment, employment, manufacturing, consumption, and nominal GDP growth. He said cuts to public sector spending to stabilize conditions would risk slowing growth further.

Crisil is an India based rating agency. It expects more retail fuel price increases. It warned higher transport costs would push up food and core inflation across the economy.