$10 Oil Price Hike Could Spike India's Inflation by 60 bps, Warns Expert

A USD 10 increase per barrel in crude oil prices could raise India's headline inflation by 55-60 basis points in FY27.

"Every USD 10 rise in average crude prices in FY27 can increase India's headline inflation by 55-60 basis points, given the higher weight of fuel in the CPI basket," Kasture told ANI in a mailed interview.

She said oil marketing companies may absorb some of the initial impact, but "sustained high prices could lead to pass-through to consumers," increasing inflation further.

India is particularly exposed because it depends heavily on West Asia, which supplied about 51 per cent of its crude and petroleum imports in the first 10 months of FY26. With crude prices currently above USD 115 per barrel, import costs have risen sharply, adding to inflation risks.

Higher oil prices could also hurt economic growth by widening the current account deficit (CAD). "Higher oil prices could widen the current account deficit (CAD) for FY27 by 30-40 basis points for every USD 10 increase in average price," Kasture said.

Despite these challenges, India's growth for FY27 is expected to remain between 6.5 per cent and 6.8 per cent, supported by strong domestic demand.

Currency pressures may also increase. "A shift toward safe-haven assets, such as the US dollar, could strengthen the dollar, putting pressure on the Indian rupee," she said, noting that a higher CAD could weaken the rupee further.

Kasture also warned about risks to exports and remittances. "Over one-third of remittance inflows come from Gulf economies, which could weaken if the conflict disrupts regional labour markets," she said. She added that shipping disruptions could impact exports to the region, which accounted for USD 64 billion (14.7 per cent of total exports) in FY25.

On government finances, rising energy costs may increase spending. "An increase in LNG prices and the consequent upward pressure on fertiliser prices could result in higher subsidy outgo," Kasture said, noting that over a quarter of India's fertiliser imports come from West Asia.

However, she highlighted some positive factors. "India's diversification of crude sourcing can provide some cushion," she said, adding that efforts like ethanol blending are helping reduce fuel demand growth.

She also pointed to policy flexibility. "The central bank has kept policy rates unchanged citing geopolitical uncertainties, providing flexibility to respond to any escalation in inflationary pressures," she said.

"India continues to benefit from strong macroeconomic buffers, underpinned by resilient domestic demand, a comfortable external position, and a credible path of fiscal consolidation," Kasture added, noting that strong foreign exchange reserves can help manage external shocks.

- ANI