DBS Group Research economist Radhika Rao highlights India’s heavy reliance on imported energy and expects INR to stay under pressure. She notes their calculations show that every $10bbl move in oil prices can raise the current account deficit by 0.35% of GDP, with the impact on inflation (20-30bps) contingent on the extent of pass through to the retail prices.

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"While India’s direct trade with Iran has diminished sharply over the past 5-6 years due to US sanctions, six out of the top ten suppliers of petroleum and crude oil to India are from the Middle east, accounting for more than half of the total supply."

"Our calculations show that every $10bbl move in oil prices can raise the current account deficit by 0.35% of GDP, with the impact on inflation (20-30bps) contingent on the extent of pass through to the retail prices."

"India had undertaken measures to reform its fuel sector by deregulating petrol and diesel prices, allowing them to align with market rates to reduce fiscal deficits and losses of the upstream oil marketing companies. This helped to lower the fiscal burden on the government’s books, with total subsidies accounting to 1.2-1.3% of GDP, of which petroleum amounts to less than 3% of the total. "

"However, in the event of a sharp rise in global fuel prices, authorities are likely to be cautious about fully passing on higher costs to consumers. The need to protect household purchasing power and support businesses as well as a packed state election calendar in 1H26 may prompt a more measured approach to retail fuel price adjustments."

"A second order impact will be on remittances and consequently on the current account math if hostilities drag on for a few months (we see this as a remote possibility for now). We don’t expect the central bank to shift policy gears at this juncture, with an extended pause still at play."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)