Crude Oil Surge Adds Pressure On Indian Economy; $10 Hike May Raise Spending By 0.4% Of GDP

International crude oil prices jump as Israel-Iran conflict sparks fears of inflation and supply issues in India and global markets

On June 16, Brent crude went up by 0.82% to $74.84 a barrel, and US West Texas Intermediate (WTI) rose by 0.99% to $73.70 in the early trading hours. In the previous session, prices had gone up by more than $4. By the end of Friday, both oil price benchmarks were 7% higher, after rising over 13% during the day to reach their highest levels since January.

This surge follows a series of military attacks between Israel and Iran. Israel recently hit Tehran, while Iran responded with drone and missile strikes. On Monday, Israel launched more missile attacks in central Iran.

How Rising Oil Prices Affect India

Changes in the global supply of oil can strongly affect India's economy, especially when it comes to keeping prices stable. Since India depends on imports for about 85% of its crude oil, any increase in oil prices can have many effects on the country's economy.

"This worsens the trade balance and puts pressure on the rupee, increasing the risk of currency depreciation. Higher oil prices increase the demand for dollars, putting downward pressure on the rupee. A weaker rupee makes all imports-including oil-even more expensive, creating a feedback loop of imported inflation," explained market expert Sunil Subramaniam.

Fuel and transportation costs rise with crude oil prices, which then affects the cost of other goods and services. Sectors like aviation, transport, chemicals, and paints get hit the hardest because they depend heavily on oil.

The government also faces pressure because it subsidizes fuels like LPG and kerosene. "When crude prices rise, the cost of maintaining these subsidies increases, directly widening the fiscal deficiC. The fuel subsidy bill has ranged from ₹34,000 crore to ₹53,000 crore. The government sometimes compensates oil companies for keeping retail prices steady, either by issuing oil bonds or delaying payments, which hides the short-term impact but increases long-term fiscal pressure," Sunil Subramaniam added.

He also noted, "To protect consumers, the government may cut excise duties on petrol and diesel. But every ₹1/litre cut reduces government revenue by about $1.5 billion (0.06% of GDP), which adds to the fiscal strain."

What Happens If Oil Prices Rise by $10?

A $10 increase in crude prices can seriously affect India's economy. It raises the Current Account Deficit (CAD), which measures the gap between what the country imports and exports.

"A $10 increase in crude can increase government expenditure by 0.4% of GDP. There will be some compensating revenue increase and the net result could be about 0.3%. We might also find alternative oil sources, so, I do not see a series deterioration in the deficits," said M Govinda Rao, Chairman of the Karnataka Regional Imbalances Redressal Committee.

According to the Reserve Bank of India (RBI), a 10% rise in crude prices can raise inflation by 30 basis points (bp), but only if prices stay high. "So far, the price spike is temporary, but we can't ignore the risks. However, since domestic inflation has been low and below 4%, even a 30 bps rise won't cause major problems," said Anitha Rangan, Economist at Equirus Securities.

Oil prices also affect India's foreign reserves and the rupee's value. As import costs go up, company profits may shrink, which can hurt stock market performance.

'India CPI (retail inflation number) has come in better than expected at 2.8% vs estimates of 3% and 3.16% in April 2025 as food inflation almost halved to a 43-month low at 0.99% from 1.78% in April 2025. CPI inflation number is at 75 months low. Sentimentally positive for Indian rupee,' noted Mirae asset sharekhan report.

On the positive side, Petroleum Minister Hardeep Singh Puri shared that India might be close to discovering a large oil reserve in the Andaman Sea. He compared it to the major oil find in Guyana, saying it could boost India's push for energy independence.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.