The Oil Shock Is Weakening India’s Economy and Finances

By Tsvetana Paraskova of OilPrice.com

India is scrambling to contain the economic and financial impact of the worst oil supply disruption in history as analysts say the high oil prices would continue to weigh on the Indian currency, economic growth, and public finances as long as supply is choked at the Strait of Hormuz.

More than three months after the Iran war began, investment banks, brokerages, rating agencies, and even India’s central bank are lowering economic growth forecasts, while the government intervenes to stop the cash bleed from the balance of payments that has surged with the oil prices.

India, which imports more than 85% of the oil it consumes, received about half of all its imports from the Middle East before the war. Now, state-owned and private refiners are looking to diversify imports, including by taking in record volumes of Russian oil, and turning to Venezuela and Brazil for additional crude to offset the lost Middle Eastern supply.

Yet, the high import prices, with oil up by about $30 per barrel compared to pre-war levels, are weighing on India’s economic prospects and public finances.

“India is set for a series of supply shocks,” Michael Langham, emerging markets economist at Aberdeen Investments, told Reuters.

India on Friday introduced measures to protect its currency, the rupee, which had plunged to an all-time low versus the U.S. dollar amid the energy crisis.

Yet, the world’s third-biggest crude importer has seen its growth prospects diminished as its high import dependence and the high price refiners pay weigh on inflation and GDP growth.

India’s economy remains resilient to the external shocks, but the oil price surge poses near-term downside risks to economic growth and upside risks to inflation, the Reserve Bank of India (RBI) said at the end of May.

Indian wealth and asset manager 360 ONE Capital last week said that India’s inflation is set to accelerate to 4.8% in the fiscal year 2027, if oil prices average $90 per barrel through March next year. 

“A further $10/bbl increase in crude prices above our base assumption could push inflation to 5.6 per cent (assuming a partial pass-through of around 5 per cent to retail fuel prices), lower GDP growth by an additional 40 bps to 5.9 per cent, widen the current account deficit to 2.5 per cent GDP, and increase the fiscal deficit to 4.8 per cent of GDP,” analysts at 360 ONE Capital wrote in a report.