The recent missile attacks by Iran on Israel have sent crude oil prices soaring by 4%, causing concern for the global oil market. For India, which imports the majority of its oil, the rising prices could lead to serious economic repercussions. As tensions escalate, experts are warning that prolonged increases in crude prices could harm the Indian economy.
Rising Crude Prices Could Push Inflation Higher in India
Sugandha Sachdeva, founder of SS WealthStreet, explains that a $10 rise in crude prices could increase India’s inflation by 0.3%. This would also widen the current account deficit (CAD) by $12.5 billion, which equates to about 43 basis points of India’s GDP. She highlights that increased transportation costs would reduce the purchasing power of Indian consumers, as the cost of goods and services rises across the board.
Disruption in Oil Supply May Further Increase Prices
Jigar Trivedi, Senior Research Analyst at Reliance Securities, adds that if oil prices continue to climb, India will have to spend more foreign currency to meet its oil demands, weakening the rupee in the process. Iran, which produces 1.7 million barrels of oil per day, plays a crucial role in global oil supply, especially through the Strait of Hormuz, a key route for major oil exporters like Saudi Arabia, Qatar, and the UAE. Any disruption here could lead to even higher crude prices.
Indian Economy Already Showing Signs of Strain
India’s economy is already feeling pressure, as seen in the recent decline of the Manufacturing PMI to an eight-month low. Additionally, the current account deficit in the first quarter has risen to 1.1% of GDP. Higher crude prices could exacerbate these existing challenges, leading to greater economic strain for India.
Impact on the Rupee and Rising Import Costs
If the current account deficit continues to widen, India will need to spend even more dollars on oil imports, which would further weaken the rupee. This weakening of the currency would result in higher import costs for essential goods, contributing to higher inflation. With fuel and light already making up 6.84% of India’s retail inflation, the impact of rising crude prices could be felt throughout the economy, pushing inflation closer to 4%, a figure India had reached in August.
