India’s inflation outlook remains stable despite the US-Israel-Iran war pushing global crude prices higher, four economists told Mint, citing low prices, adequate strategic reserves, and the government’s ability to cushion fuel shocks from spilling into retail prices.
In January, the Consumer Price Index (CPI)-based inflation, under a revised data series, stood at around 2.75%, significantly below the Reserve Bank of India's (RBI) medium-term target of 4%.
With inflation currently subdued and a newly introduced CPI series indicating broadly similar trends to the old base-year data, the economists said the starting point itself provides a strong buffer against external shocks, likely preventing any immediate pressure on retail inflation or RBI's monetary policy outlook.
For 2025-26, the RBI has projected CPI inflation at 2.1%, with the March quarter at 3.2%. Inflation for the June and September quarters is seen at 4% and 4.2%, respectively, suggesting the current price environment is far more benign than during previous geopolitical shocks.
“I think the starting point is more comfortable for RBI at this juncture, given that inflation is more manageable now compared with the Russia-Ukraine war, when global commodity prices surged sharply,” Anubhuti Sahay, head of India economic research at Standard Chartered Bank, said.
Sahay added that policymakers are unlikely to rush to revise projections or change the policy stance until there is greater clarity on how long the war will last and how significantly it will disrupt global energy markets. “It’s premature to say whether RBI will have to change its stance.”
Brent crude prices have risen nearly 14% to above $84 per barrel, according to Bloomberg, since 28 February, when the US and Israel launched military strikes against Iran, targeting key leadership and military infrastructure and also killing Iran’s top leader, Ayatollah Ali Khamenei.
In retaliation, Iran has launched drone and missile attacks on US military bases and key energy infrastructure across West Asia and shut the Strait of Hormuz, one of the world’s most critical oil shipping routes that carries around 20% of global oil supplies.
India, the world’s third-largest oil buyer, consumes about 5.5 million barrels of crude daily, of which 1.5-2 million barrels pass through this chokepoint.
In a relief for New Delhi, the US government has granted the country a 30-day waiver to purchase Russian oil to help stabilize global supply, as US President Donald Trump projected on 2 March that the US’s Operation Epic Fury could last four to five weeks.
Limited impact
Even if oil prices remain elevated, the impact on retail inflation may be limited. Based on calculations using the new CPI series, Sahay estimated the potential impact of 40-60 basis points, assuming oil prices increase by 10% and are fully passed on to consumers.
Besides, India has sufficient strategic petroleum reserves insulating it from immediate inflationary pressures.
“Apparently, we have 74 days of strategic reserves. For, I think, four weeks, OMCs (oil marketing companies) will absorb it. So there will be no impact on inflation,” Gaura Sengupta, chief economist at IDFC FIRST Bank, said.
As of 6 March, petrol was retailing at ₹103.54 per litre and Diesel at ₹90.03 per litre in Mumbai.
Even if crude prices remain elevated for several months, the broader macroeconomic impact may still be contained.
“If, let's say, we had $80 a barrel crude oil for four months, even then India’s CAD (current account deficit) estimate goes up by only 0.1% of GDP (gross domestic product),” Sengupta said, adding that she does not believe the Centre will let the consumers feel the heat of inflation and keep farmers protected.
However, she cautioned that a prolonged conflict could eventually strain fiscal balances through higher subsidies. “The longer it persists, then yes, it can have an impact on the fiscal deficit. For example, during the Russia-Ukraine war, the fertilizer subsidy had gone up by around 0.6% of GDP,” she said.
The economists also said even if crude oil prices rise, the impact on retail fuel prices, and therefore inflation, may be modest because taxes account for a large share of the final price consumers pay.
The actual crude component in petrol prices is relatively small, and even if crude oil prices were to rise by 10%, the increase in the underlying fuel cost would be relatively small, Madan Sabnavis, chief economist at Bank of Baroda, said. “The actual cost won’t go up by more than ₹3-4, even if the full amount has to be passed on,” he said.
Given this structure, the inflation impact would remain minimal even if some price adjustments occur. “Even if they increase it by, say, 2% or 3%, it will be a 0.2% inflation increase. That is not much,” he said.
With India expected to face a hotter-than-usual summer, the economists warned that rabi crops could be affected. Edible oil prices have also risen due to the crisis, which could feed into inflation.
Fiscal burden
Meanwhile, ratings agency Moody’s said costly energy imports into the country would weaken the rupee, raise inflation, worsen the current account balance, and complicate monetary and fiscal policy if they lead to expanded subsidies to help offset the economic shock.
“India stands out among the large Asian economies that rely on crude and liquefied natural gas (LNG) from the Middle East (West Asia), with a high share of Middle Eastern crude among total oil imports, and pressure from the US to cut its energy imports from Russia,” Moody’s said in a 5 March report.