Rising crude oil prices pose a complex challenge to the Indian economy, primarily through their impact on the rupee and overall macroeconomic stability. As a nation heavily reliant on crude oil imports, India's economic fate is closely intertwined with global oil price fluctuations. India imports about 90.6% of its crude oil consumption as of May 2025. Any increase in crude oil prices immediately translates into a higher import bill.
One of the most direct consequences of rising crude oil prices is the widening of India's current account deficit (CAD). Crude oil constitutes a significant portion of India's total imports; in FY24 crude oil imports were valued at approximately $180 billion. A $10 increase in Brent crude can widen the CAD by 0.5% of GDP. This puts downward pressure on the rupee, as increased dollar demand to pay for the costlier oil leads to a depreciation of the Indian currency. A weaker rupee, in turn, makes imports even more expensive, creating a vicious cycle. The rupee comes under stress causing its depreciation. According to ICRA (Investment Information and Credit Rating Agency of India Limited), the current account deficit (CAD) is likely to widen by approximately US$14-15 billion (0.4% of GDP) for every US$10/bbl rise in the average price of the Indian crude basket.
Inflation is another major concern. Rising crude oil prices have a ripple effect across the economy, impacting transportation, production, and logistics. Higher fuel costs directly increase freight charges and supply chain expenses, leading to cost-push inflation. This affects various sectors, including airlines, paints, tires, and consumer goods, as companies pass on the increased costs to consumers. Common people feel the pinch of the price hike as they will have to compensate for the rise in inflation with their wages. According to a report by the Bank of Baroda, every 10% increase in crude oil prices, the wholesale price index (WPI) increases around 0.9%, and the consumer price index (CPI) may increase by 40-60bps.
The impact extends to GDP growth as well. Higher oil prices raise production costs across industries, squeezing corporate profit margins. Consumers face higher prices for essential goods and services, which erodes disposable income and reduces overall demand. The Indian government has said it is monitoring the situation and the country has adequate supplies and continues to receive oil from several routes. Also, any move to block the Strait of Hormuz may put significant cost pressures on India, even though it no longer buys oil directly from Iran due to US sanctions.
To mitigate these adverse effects, the Indian government can explore several policy options. One approach is to diversify crude oil import sources and routes. The Committee recommended that the Ministry of Petroleum and Natural Gas take steps to diversify the imports of crude oil and gas. Exploring newer and shorter routes for transporting crude oil from different locations, especially those with less geo-political tensions can also help. Promoting the use of alternative fuels and renewable energy sources is another crucial step. The government has prepared a roadmap to reduce dependence on imports in energy. It provides for: (i) increasing domestic production, (ii) promotion of bio-fuel and renewable energy, (iii) promoting energy efficiency, and (iv) improvement in the refinery process.
However, these measures require long-term planning and investment. In the short term, the government may consider reducing taxes on petroleum products to ease the burden on consumers. If the government eases consumer pressure by lowering taxes on petroleum products, revenue loss will affect fiscal numbers. Keeping Iranian oil exports going will moderate price spikes, and therefore the size of the oil shock. So the policy choice is whether to continue buying oil from Iran as it is the Iran sanctions that are expected to send oil prices higher. But the challenge is that it could invite US sanctions.
