The economic impact of crude oil surging above $119 per barrel will depend on how the government manages fuel prices, taxes and subsidies, economists say, as risks rise for inflation, the rupee and the current account deficit.
Economists warn that a sustained spike in crude oil prices could widen India’s current account deficit, pressure the rupee and raise inflation, though the final impact will depend on fuel price transmission and fiscal measures.
The sharp rise in crude prices has renewed concerns about its potential impact on the Indian economy, but economists say it will largely depend on how the government manages domestic fuel prices and related fiscal measures.
Global crude oil prices jumped above $119 per barrel on Monday, reaching their highest level since mid-2022, as supply cuts by major producers and fears of prolonged shipping disruptions unsettled energy markets.
The spike follows escalating tensions surrounding the Iran conflict, with traders increasingly worried that the crisis could continue for several months and disrupt key oil transport routes.
What do economists say?
The government’s response will play a crucial role in determining the fiscal consequences, said Madan Sabnavis, Chief Economist at Bank of Baroda. If authorities choose to reduce excise duties on fuels to cushion consumers, it could lead to a loss in tax revenue.
Alternatively, if oil marketing companies absorb part of the higher costs while passing the rest to consumers, the direct fiscal impact on the government may be relatively limited, he said. “Subsidy on fertilisers will be under pressure for sure, and depending on how gas prices move, this may have to be calibrated,” Sabnavis said.
Sabnavis said the rupee has already weakened and could remain under pressure depending on developments in the trade deficit and foreign portfolio investment flows. For the near term, he expects the currency to remain within the range of Rs 91.5 to Rs 92.5 per US dollar, although the trajectory will depend on the extent of intervention by the Reserve Bank of India.
Remittance inflows could be affected if the conflict intensifies. India receives roughly $140-145 billion annually in remittances. Although developed economies now account for a larger share, about 30-35% of remittances still come from the Gulf region.
Any disruption to employment conditions in West Asia could affect income flows for migrant workers and eventually reduce remittance inflows, Sabnavis said.
What do analysts at Fitch ratings say?
According to Fitch Ratings, the Iran conflict could create additional economic challenges for several emerging markets. These pressures could arise through multiple channels, including energy imports, fiscal subsidies, exchange rates, remittance flows and access to international finance.
Energy imports remain the most direct transmission channel for emerging economies, given the influence of global oil prices. Net fossil fuel imports account for more than 3% of GDP in several large economies, including India, Fitch said.
Domestic rating agency ICRA estimates suggest that every $10 increase in the average crude price during the year could raise the current account deficit by about 30-40 basis points. For example, if crude averages around $100-105 per barrel, the deficit could rise to roughly 1.9-2.2% of GDP, ICRA chief economist Aditi Nayar said.
Higher oil prices could also influence inflation dynamics. Under the revised CPI series with a 2024 base year, fuel items carry a weight of 6.84%, higher than the 4.2% in the earlier 2012 series. However, fuel has a larger weight in the wholesale price index at about 10.4%. “Consequently, changes in crude oil prices will have a larger impact on the WPI compared to the CPI,” Nayar said.
ICRA estimates that a 10% rise in crude prices could increase wholesale inflation by around 80-100 basis points, while consumer inflation may rise by about 40-60 basis points if the increase is fully passed on to retail fuel prices. The final effect will depend on the degree of price transmission to petrol, diesel and LPG.
Beyond direct fuel costs, higher energy prices can raise transportation expenses and trigger second-round effects across the economy by increasing the prices of goods and services, Nayar added.
Anuj Sethi, Senior Director at Crisil Ratings, said if crude prices average around $120 per barrel compared with about $66-67 during January-February 2026, the additional cost could be substantial. A rise of around $50-55 per barrel would translate into an extra foreign exchange outflow of nearly $7-8 billion per month.
“Such an increase would widen the current account deficit and increase import-related inflationary pressures. That said, the actual impact would, however, depend on the duration of elevated prices and demand elasticity,” Sethi said.
Over time, higher energy costs could also raise logistics expenses, push up manufacturing input costs and increase food and commodity prices, exerting upward pressure on both wholesale and consumer inflation if elevated oil prices persist, Sethi added.
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