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Oil Price Surge to Push India's WPI Up by 1%, Impact GDP & CAD: Report

A Bank of Baroda report states a sustained 10% increase in global oil prices could directly raise India's Wholesale Price Index by nearly 1%. This would increase oil imports by an estimated $18 billion, widening the current account deficit and potentially pushing the rupee beyond 92 against the dollar. Fiscal pressures may also mount from higher fertilizer and petroleum subsidies, alongside potential cuts in excise duty. Despite these external headwinds, the report maintains India's GDP growth forecast of 7-7.5% for FY27, supported by resilient domestic demand.

Key Points: 10% Oil Price Rise May Add 1% to India's WPI Inflation: BoB

  • Direct WPI impact ~0.7-1%
  • Oil imports may rise $18bn (0.5% GDP)
  • CAD & currency pressure expected
  • Subsidy bill could increase
  • FY27 GDP growth estimate 7-7.5%
3 min read

Direct impact of 10% increase in oil prices estimated to be around almost 1% on WPI: Bank of Baroda

Bank of Baroda report warns a 10% oil price hike could raise WPI by 1%, widen CAD by $18bn, and pressure currency, while GDP growth holds at 7-7.5%.

"permanent 10% hike in oil prices is expected to drive oil imports up by USD 18bn or 0.5% of GDP. - Bank of Baroda report"

New Delhi, March 6

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. 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 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.

"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% 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."

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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Reader Comments

R
Rohit P
The report is honest but the situation is frustrating. Every time there's tension in the Middle East, our economy takes a hit. We are too dependent on imported oil. We really need to push for electric vehicles and renewable energy faster. This vulnerability is a national security issue.
S
Sarah B
Interesting read. The shift in remittance sources from GCC to advanced economies is a positive long-term trend, but the immediate export pressure on refinery products is a real worry. Hope the diplomatic channels are working overtime to ensure stability in the region.
A
Aditya G
The part about OMCs absorbing the cost is key. If they don't pass it on, it hurts their balance sheets and eventually the government's dividend income. If they do pass it on, inflation hits us. It's a classic "damned if you do, damned if you don't" for policymakers.
K
Karthik V
While the analysis is technically sound, I feel it underplays the impact on the middle and lower-middle class. A weaker rupee (92/$!) makes everything imported more expensive, not just oil. Mobile phones, electronics, even some food items will cost more. The 7% GDP growth won't mean much if purchasing power falls.
M
Meera T
The focus on strong domestic demand is reassuring. Our internal market is big enough to cushion some external shocks. But the government must ensure that subsidies for fertilisers and fuel are managed wisely without blowing up the fiscal deficit. Tough balancing act ahead!

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