Oil is warming up, but India's inflation may escape the heat
Crude oil prices may pick up as a consequence of the Iran-Israel conflict. However, state-run companies such as HPCL, BPCL and IOC are expected to absorb the hike, shielding consumers from higher petrol and diesel prices. Consequently, inflation may not pick up either.
Escalating conflict between Iran and Israel and a consequent increase in crude price are unlikely to impact India’s inflation print, economists said, with state-run refiners expected to absorb the price hike instead of passing it on to consumers.
Brent crude prices have been rising since Friday, after Israel struck Iran's nuclear facilities and killed several top officials and scientists. Iran vowed “harsh punishment" after the strikes and has retaliated. Experts said the trajectory of oil prices depends on whether Iran closes the Strait of Hormuz, through which about a fifth of the world’s oil supply passes. On 14 June, Al Jazeera reported citing Iranian news agency IRINN that Iran is considering closing the strait.
For India, which imports close to 90% of its energy requirements, the impact on inflation would depend on the benevolence of state-run oil marketing companies. While higher crude prices would raise India’s import bill, it would not lead to runaway price rise, if OMCs absorb the hike. An estimate by Emkay Global Financial Services’ chief economist Madhavi Arora showed that for every $10 per barrel increase in oil leads to an annualized increase of 35 bps in retail inflation. That said, Emkay retained its inflation forecasts.
“They (retail petrol and diesel prices) have been unchanged in the last couple of years and only when these prices change, will there be an impact on the inflation print," said Gaura Sengupta, chief economist, IDFC First Bank. “Given the fact that when crude prices were low, the retail prices were not changed, now when crude has picked up, OMCs will not change it," Sengupta said.
Also read | Israel-Iran conflict: How will rising crude oil prices affect India?
Before the conflict broke out, the Reserve Bank of India (RBI) on 6 June lowered its inflation forecast by 30 basis points (bps), with retail inflation for FY26 now pegged at 3.7%.
An official from a state-run oil marketing company (OMC) said that no price revision is on the cards right now. "The prices were low for a long time, and no revision was witnessed. So, any revision is unlikely in the short term," the official said on condition of anonymity.
The official said that as of now, crude prices are by and large in a comfortable range, and a price increase is not warranted.
Pump prices of petrol and diesel stood at ₹103.5 per litre and ₹90.03 per litre on 16 June, respectively in Mumbai, as per government data. In the past year, these prices have declined by 71 paise and 212 paise, respectively. In the same period, Brent crude prices dropped 13% to $73.28 per barrel, data from Bloomberg showed. Reuters reported on Monday that Brent climbed past $78 at open on Monday, before pulling back.
“If Brent averages at $75 per barrel from now till March, our current account deficit estimate, which was 1.5% of GDP, becomes 1.7%. We are starting from a very low base of current account deficit; 1.7% is also quite low and as per RBI, a CAD below 2.5% of GDP, is manageable and so, rising oil prices will have a limited hit on the deficit," said Sengupta.
She added that as per RBI's own sensitivity analysis, if the price of $75 per barrel sustains till March, then the impact on real GDP growth is very small, a decline of 6-7 basis points. The central bank retained India’s growth projections at 6.5% for FY26, while saying that it remains below its aspirations. The economy expanded 6.5% in FY25, the slowest in four years, showed data released end-May.
Others said the government has followed a policy of keeping pump prices unchanged and not passing on any benefit when the crude oil price fell, and therefore, when it goes up, it will have to be absorbed to some extent.
“If you look at this overall 2.5-3%, which is the weightage of petrol and diesel in CPI (consumer price index), an increase in the international prices right now will not lead to any pass-through to the consumer. I think they're going to make the adjustments in gains that were shared by the oil marketing companies and the government, which will absorb the impact of the rise in crude prices," said Madan Sabnavis, chief economist, Bank of Baroda.
Sabnavis said crude oil prices going up may be a temporary phenomenon and could last up to a month. Even when the Ukraine-Russia conflict broke out in February 2022, prices settled after a month or so, he said.
Also read | Israel vs Iran could be worse for markets than Russia vs Ukraine. Here’s why.
“That was also when the overall supply of oil itself came under pressure, because Russia is a major seller of oil in the market, unlike Iran, which actually is not supposed to be selling anything in the international market. Iran is a marginal producer, but doesn't really contribute to global consumption in any significant manner," he said.
To be sure, Indian policymakers are concerned about likely crude oil supply disruptions in the Strait of Hormuz but are prepared for any eventuality, Mint reported on 13 June citing two people with knowledge of the developments.
According to analysts at Kotak Institutional Equities, the sharp increase in global oil prices in the past few days and the risks of oil prices rising further and staying at elevated levels may weaken India’s macroeconomic position. However, it would not have a significant impact.
“We would clarify that India’s economy will not be affected meaningfully by $10-20/barrel higher prices, given the size of the economy," Kotak Institutional Equities said in a note to clients on 13 June. “Nonetheless, higher oil prices could weaken one of the central arguments for high valuations of the Indian market."
And read | Govt to hold talks with exporters as Iran-Israel conflict stalls shipments, drives up costs
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