A 10 per cent increase in global oil prices is estimated to have a direct impact of approximately 0.7-1 per cent on India’s Wholesale Price Index (WPI). According to a report by Bank of Baroda on the Middle East crisis, the overall effect could reach a 1 per cent increase in WPI inflation when indirect impacts are included.
As per the report, the external position of the economy faces pressure. With India importing roughly $ 5 million per barrel of crude in FY25, a “permanent 10 per cent hike in oil prices is expected to drive oil imports up by $ 18bn or 0.5 per cent of GDP.”
The report noted that crude oil and related products currently carry a weight of 10.4 per cent in the WPI basket. In the new Consumer Price Index (CPI) series, these products hold a 6.8 per cent share, a significant rise from the 2.4 per cent seen in earlier series.
“Most of the higher pass-through of higher international crude prices will be absorbed by OMCs, as of now,” the report stated, referring to Oil Marketing Companies.
This shift is likely to result in a higher current account deficit. The report said, “We expect currency to trade in the range of 91-92/$. RBI interventions to duly lend support, 92-mark may be crossed if the war continues for some time.”
Exports and remittances are also under watch. India’s share of exports to Gulf nations stood at approximately 13.7 per cent in FY25, with refinery products accounting for 14 per cent of that figure. Consequently, “export pressure for refinery products may intensify” if regional de-escalation is delayed.
While the Gulf Cooperation Council (GCC) has traditionally dominated remittance inflows, data shows a shift toward advanced economies, though unrest in West Asia may still affect these flows.
The fiscal position remains sensitive to subsidy fluctuations. A rise in the rates of Liquefied Natural Gas (LNG) and oil could lead to an “increase in fertiliser (0.42 per cent of GDP as per FY27BE) and petroleum (0.03 per cent) subsidy bill” if OMCs absorb the added costs.
This puts pressure on non-tax receipts, as dividends from Public Sector Undertaking (PSU) companies may fall. Additionally, the government may face a “reduction in excise duty collection if rates are cut to keep retail prices under control.”
Despite these headwinds, the report noted that “we stick with our estimated GDP growth of 7-7.5 per cent for FY27.” It suggested that while “headwinds may emerge on account of a weakening external position,” domestic demand is expected to keep the country’s growth largely insulated.
