Oil and the Strait of Hormuz chokehold
India’s dependence on oil imports from the Gulf and via the Strait of Hormuz is a source of vulnerability. India imports more than 85 per cent of its domestic oil needs, and Iraq, Saudi Arabia, the United Arab Emirates and Kuwait together comprise close to 46 per cent of crude oil imports.
The Strait of Hormuz is a critical chokepoint. Around 20 per cent of global oil supply transits this route, while for India, around half of crude oil and LNG imports, and 100 per cent of imported LPG currently pass through this Strait. Importantly, this comes at a time when India’s crude oil shipments from Russia have moderated.
Commercial operators and insurers have withdrawn from the route due to the conflict, and very large crude carrier spot rates have jumped by a whopping 1,100 per cent this year, rendering the Strait of Hormuz de facto closed.
It remains unclear how long the disruption will last, but the longer it lasts, the greater the risk of ripple effects across the supply chain. Sustained, elevated oil and gas prices increase transport costs, spill over into fertiliser prices and could lead to higher food prices.
The rise in oil prices is a stagflationary shock for a net oil importer like India, and it worsens the twin deficits. Higher energy costs weaken growth due to a squeeze in corporate profit margins; higher inflation can erode household real disposable incomes; and heightened uncertainty and financial market volatility can weaken confidence. On our estimates, every 10 per cent rise in oil price, if fully passed on to consumers, can lower gross domestic product (GDP) growth by 0.15 percentage point (pp), raise consumer price index-based inflation rate by 0.5 pp and worsen the current account by 0.4 per cent of gross domestic product (GDP). If the oil price increase is not passed on to consumers, the inflation and growth impact would likely be more muted, but the fiscal cost would be higher at about 0.15 per cent of GDP.
The implications of higher oil prices are adverse, but the economic impact also depends on the duration of the price shock. A sharp but temporary price spike is more manageable, whereas a sustained price rise would be more damaging. We don’t know which scenario will prevail right now.
There are some stockpiles in case of disruptions. India’s commercial crude stocks at 100 million barrels and strategic reserves at 39 million barrels combined roughly equate to 30 days of crude consumption and 60 days of crude supply from West Asia.
Oil marketing companies (OMCs) have some marketing margin buffer for both petrol and diesel to absorb higher crude oil price. We estimate OMCs can stay in the black until Brent crude oil prices sustainably cross $85 per barrel (bbl).
Importantly, India’s starting position is much stronger. Underlying inflation has remained benign for over two years, and there are signs that cyclical growth will accelerate in the coming quarters due to the lagged effects of past policy easing, easier financial conditions, growth-oriented Budget, stable global growth, lower tariffs and recent trade deals.
External vulnerabilities remain the primary concern. At Brent oil prices of $80/bbl, the current account deficit will widen from less than 1 per cent of GDP in FY26 to slightly above 1.5 per cent in FY27. This is low by historical standards, but challenges remain from the capital account. Foreign portfolio investment outflows driven by global risk aversion, combined with ongoing foreign direct investment (FDI) repatriation by multinational companies and India’s own outward direct investment could create balance of payments funding pressures in the short-term.
Given the elevated uncertainty, it is prudent to wait and watch for now. If this indeed proves to be a short-duration energy price shock, its spillovers should be manageable.
If oil prices remain elevated, the government may need to activate fiscal policy as the first line of defence. Fiscal intervention could include higher subsidies, domestic fuel excise tax cuts and lower import tariffs on crude oil and refined products. This involves a trade-off between growth and fiscal balances, but it acts as a bridge.
For monetary policy, elevated oil prices solidify the case for holding rates steady. This is a supply-side shock and has offsetting effects on growth (lower) and inflation (higher). Managing volatility in currency markets is the main priority, while monitoring any broadening of price pressures.
Finally, ensuring energy security requires diversifying energy sources towards the US, Canada, West Africa and Latin America, which may be more expensive, but are essential for resilience. Building a larger strategic petroleum reserve and accelerating renewable energy deployment to reduce fossil fuel import dependence are also important.
Ultimately, the Iran conflict may be a short-term risk, and if the conflict ends and Iran’s sanctions are dismantled, India could also benefit from the increase in supply of crude oil over time. However, it is an important reminder that policies need to be in place to tackle the new reality of geopolitical fragmentation, where energy markets face both price shocks and supply chain vulnerabilities.
The author is the chief economist (India and Asia ex-Japan) at Nomura
 "oil trade, Russia, Crude Oil, Vladimir Putin, US sanctions")
