War, oil and the rupee: Why policy is playing defence, not stimulus

India's policy response to rising oil prices and geopolitical risks remains cautious, prioritising macroeconomic stability over stimulus as inflation pressures and second-order effects begin to emerge

Emerging Faultlines

 

The first month of the Iran conflict has had a relatively contained impact on India. For the most part, businesses have refrained from passing on supply-side cost pressures to consumers - barring sectors such as airlines and restaurants. A key reason has been the government’s decision to hold retail petrol and diesel prices steady. At a time when most major economies raised fuel prices by 10–40 per cent, Indian consumers were largely insulated. This is significant, given that diesel and motor spirit together account for nearly 60 per cent of India’s refined petroleum consumption.

 

Yet, beneath this apparent stability, inflation data points to emerging fault lines. If crude prices remain elevated - closer to India’s landed cost of around $120 per barrel - latent pressures could surface more visibly. LPG inflation has already risen, but more telling is the increase in prices of substitute fuels such as firewood, coal and petcoke. This suggests that cost pressures are diffusing across the energy chain. If sustained, this will translate into higher household 'kitchen economics', weighing on consumer sentiment and discretionary demand.

 

On the corporate side, the current phase of cost absorption may not last. Companies, which have so far shielded consumers, could begin passing on higher input costs across sectors - from FMCG, personal care and pharmaceuticals to big - ticket discretionary categories like housing and automobiles. The risk, therefore, is not just inflation, but inflation without commensurate growth - a scenario where rising prices are not supported by higher wages or profitability.

 

Second-Order Effects

 

Much of the concern around crude shortages centres on downstream industrial linkages - particularly naphtha, petcoke, hydrocarbons and petrochemicals. However, these account for a relatively small share of crude use, implying that disruptions are likely to emerge with a lag rather than immediately.

 

A key non-energy channel is naphtha, which accounts for about 7 per cent of India’s crude imports and serves as a feedstock for plastics, tyres, polyester, paints, fertilisers and core industries such as steel, aluminium and cement.

 

Naphtha consumption declined about 8% year-on-year (Y-o-Y) in March 2026, but this is not yet indicative of supply stress. Consumption has been contracting structurally (roughly 9 per cent average decline through FY26), driven by:

• Shift to cheaper alternatives such as natural gas

• Global demand slowdown (including tariff-led disruptions)

• High inventory levels

 

This suggests that the recent dip is more structural than conflict driven.

 

In contrast, near-term stress is more visible on the demand side. Export-oriented sectors with high Gulf exposure - perishables, FMCG, auto components, textiles, and gems and jewellery - are already facing shipment disruptions.

 

Fuel-intensive sectors such as restaurants are also seeing early pressure, though mitigants like alternate fuels and menu rationalisation are providing temporary relief. If disruptions persist beyond a quarter, stress is likely to broaden to real estate, transport and other consumption-linked sectors.

 

These suggest second-order effects are not immediate, but risks will build if supply disruptions persist.

 

A Coordinated Policy Response

 

It is in this context that the broader policy response needs to be understood. The approach so far has been calibrated and defensive, aimed at preserving stability rather than stimulating growth prematurely.

 

On the fiscal and administrative side, measures have been targeted and timely. The decision to hold retail fuel prices steady has contained immediate inflationary spillovers. In parallel, the government has introduced relief measures for exporters facing shipment disruptions - helping offset losses from stalled cargo and rising logistics risks.

 

At the same time, there has been regulated easing and prioritisation of LPG supplies, particularly for essential and high-dependency segments such as restaurants and select industries. This has helped minimise panic, prevent hoarding, and ensure efficient allocation in a period of constrained availability.

 

On the financial side, policy has remained steady despite rising risks - reflecting a conscious choice to avoid overreacting to what remains, for now, a supply-side shock.

 

This coordinated stance is shaping outcomes: 

• Stable financing conditions: Adequate liquidity continues to anchor borrowing costs

• Measured rate expectations: Markets are pricing a gradual, not aggressive, policy path

• Currency stability: A cautious stance is helping anchor expectations amid global volatility

 

Taken together, this reflects a framework that is prioritising stability over stimulus. Rather than reacting to near-term shocks, policymakers are preserving room to manoeuvre—ensuring they retain the flexibility to respond if risks escalate.

 

Conclusion

 

The early impact of the conflict suggests that India’s economic resilience remains intact—but the real test lies ahead.

If energy disruptions prove temporary, the current approach will have successfully absorbed the shock with minimal damage. But if they persist, the challenge will shift from containment to mitigation—requiring more active intervention across fiscal, monetary and sectoral levers. 

For now, policy is playing defence - not out of caution alone, but as a deliberate strategy to preserve stability in an increasingly uncertain global environment.

(The author is chief economist, Piramal Finance)

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper