Middle East Crisis: Why a $50 Rise in Crude Prices Is a Big Risk for India’s Economy

The article examines how global energy price shifts could impact India's growth, inflation, and policy responses. It highlights India's reliance on imported dense energy, potential effects on the balance of payments, and the role of monetary policy if tensions persist. It also considers implications for consumer prices and investment.

India can handle the present jump in global energy prices, but prolonged stress may hurt growth, Neelkanth Mishra, Chief Economist of Axis Bank and Head of Global Research at Axis Capital, told ANI.

He has stated that short shocks look manageable, yet long conflicts could strain finances. Mishra advised that the Reserve Bank of India should wait before reacting with higher interest rates. He felt an immediate rate hike is not required if tensions ease within weeks. "However, if it evolves into a year-long conflict, monetary policy action will be necessary," he cautioned.

Global energy prices India and impact on imports

Mishra underlined that India depends heavily on imported "dense energy" and related commodities. He said the country buys 50 per cent of its dense energy from abroad. This basket includes crude oil, natural gas, fertiliser and edible oils, which are vital for households and industry.

Because of this dependence, Mishra warned that the economy is very sensitive to higher energy costs. "Every dollar increase per barrel costs approximately $1.8 billion annually. For instance, a $50 increase in oil prices represents a $90 billion impact, which is more than 2% of our GDP if sustained for a year." He said such pressure could disturb the balance of payments.

Global energy prices India, geopolitics and market worries

Mishra described the current geopolitical strain as a "game of brinkmanship that may play out for four to six weeks" before easing. According to Mishra, "Because this conflict does not serve the interests of China or the US, it is reasonable to expect it to be short-lived," and he expects fighting to end by April 2026.

He argued that both sides have limited patience for higher economic costs. West Asian suppliers are facing trouble in accessing markets, while the U.S. is seeing public anger over rising fuel prices. Mishra said markets worry more about energy terms of trade and rupee swings than headline inflation.

On inflation, Mishra stated that the impact on day-to-day fuel prices in India may stay muted initially. "On the fuel side, OMCs are sitting on significant buffers because retail pump prices remained unchanged while global prices were low," he explained. "They can likely withstand higher costs for a few months without passing them on to consumers."

Mishra added that the bigger price hit would likely appear in non-fuel imports. These include industrial gas and fertilisers, which are critical inputs for factories and farms. He estimated that this part of the energy basket could add 30 to 50 basis points to the Consumer Price Index.

On foreign inflows, Mishra said that remittances should stay stable if tensions cool within six months. He warned that "If it lasts over six months, emergency measures would be required to reduce energy demand, but that is not my base case," signalling confidence that India, including major states like Uttar Pradesh, can keep growth steady if the conflict ends quickly.

With inputs from ANI