Crude sustaining at $80 threatens to stoke CPI Inflation by 0.4%, widen CAD by 0.3-0.5%

The Reserve Bank of India (RBI) has assumed India's crude oil basket price to average $70 per barrel in 2025-26 for its inflation and growth assumptions.

• Middle East tensions push crude oil prices higher
• Higher oil prices may raise India's inflation and widen CAD
• Growth could slow if crude stays above $80 per barrel

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Tensions in the Middle East is pushing up prices of crude oil, which if sustained is likely to stoke inflation in India, widen the current account deficit, and impact growth, economists say.

The Reserve Bank of India (RBI) has assumed India's crude oil basket price to average $70 per barrel in 2025-26 for its inflation and growth assumptions. However, the Middle East conflict going on at the moment at lead crude oil prices to reach $78 per barrel.

Moreover, movement of ships through the Strait of Hormuz, which carries about 20 percent of the world's crude, has come to a standstill, as Iran continues to hit targets across West Asia in response to attacks by the US and Israel, as per industry sources. This may even lead to Brent crude price cross $90 per barrel going forward.

According to economists, if Brent crude sustains above $80 post US–Israel strike on Iran, this would stoke CPI inflation by 0.2-0.4 percentage points -- provided the prices of crude oil are passed through to retial prices.

As per the RBI, CPI inflation in 2025-26 is projected at 2.1 percent, and at 4.1 percent in H1 of 2026-27.

India imports around 85% of its crude needs, so even moderate price spikes transmit quickly into fuel and transport costs, economists say.

"A sharper escalation is conceivable that pushes crude towards $90–100, if the Strait of Hormuz is disrupted. This would raise the inflation risk materially and could force tighter monetary conditions," said Manoranjan Sharma, Chief Economist, Infomerics Ratings.

According to Madhavi Arora, Chief Economist, Emkay Global, for every $1/bbl increase in Brent, we estimate an impact of Rs 0.52/litre on diesel and Rs 0.55/litre on petrol retail prices.

But retail prices are unlikely to change with oil marketing companies (OMCs) absorbing the higher costs, say analysts. OMCs remain relatively well cushioned, with earnings from other business segments helping offset oil marketing losses, they say.

On Current account deficit (CAD), economists say a $10 per barrel rise in the average crude price over a year can worsen the CAD by about 0.3-0.5 percentage points of GDP, by raising net oil imports 13–14 billion dollars.

With crude averaging $80–90 instead of the low‑70s assumption, India’s CAD in FY26 could widen from around 1.2–1.3 % of GDP towards 1.5–1.6 % and exacerbate pressure on the rupee, they say. And for FY27, CAD could average 2 percent.

Additionally, growth is likely to be hit by 15-20 basis points if crude oil prices sustain at $80 in FY27. The finance ministry has forecasted growth at 7-7.4% in FY27.

"Higher oil acts as a tax on net importers: it erodes households’ real disposable income and raises input costs for transport, aviation, chemicals, fertilisers and several manufacturing segments," said Sharma.

Gaura Sen Gupta, Chief Economist, IDFC FIRST Bank said that impact of rise in crude oil prices will impact the government's fiscal math only if it sustains "Impact will be via potential rise in LPG subsidy, decline in PSU dividends as margins of OMCs could be negatively impacted, and potential rise in fertiliser subsidy cost."