A Bank of Baroda report estimates a 10% global oil price hike could raise India's WPI inflation by up to 1%, increase oil imports by $18bn, and pressure the current account deficit, currency, and fiscal position.
A 10 per cent increase in global oil prices is estimated to have a direct impact of approximately 0.7-1 per cent on India's Wholesale Price Index (WPI). According to a report by Bank of Baroda on the Middle East crisis, the overall effect could reach a 1 per cent increase in WPI inflation when indirect impacts are included.
Impact on External Position and Inflation Metrics
As per the report, the external position of the economy faces pressure. With India importing roughly USD 5 million per barrel of crude in FY25, a "permanent 10% hike in oil prices is expected to drive oil imports up by USD 18bn or 0.5% of GDP."
The report noted that crude oil and related products currently carry a weight of 10.4 per cent in the WPI basket. In the new Consumer Price Index (CPI) series, these products hold a 6.8 per cent share, a significant rise from the 2.4 per cent seen in earlier series.
Currency and Current Account Deficit Risks
"Most of the higher pass-through of higher international crude prices will be absorbed by OMCs, as of now," the report stated, referring to Oil Marketing Companies. This shift is likely to result in a higher current account deficit.
The report said, "We expect currency to trade in the range of 91-92/$. RBI interventions to duly lend support, 92-mark may be crossed if the war continues for some time."
Pressures on Trade and Remittances
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.
Fiscal Vulnerabilities
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% of GDP as per FY27BE) and petroleum (0.03%) 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."
GDP Growth Outlook
Despite these headwinds, the report noted that "we stick with our estimated GDP growth of 7-7.5% 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. (ANI)
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