Iran’s recent ballistic missile strike on Israel have fuelled fears of a broader regional conflict across the Middle East, sending crude oil prices up by as much as 4 per cent overnight due to concerns over supply disruptions. As oil prices continue to rise, experts warned that India, which is heavily reliant on energy imports, could face significant economic challenges.

Sugandha Sachdeva, Founder of SSWealth Street, explained that for every $10 increase in oil prices, India's inflation rises by about 0.3 per cent, while the current account deficit (CAD) widens by $12.5 billion, equivalent to roughly 43 basis points (bps) of gross domestic product (GDP).

"This can diminish consumer purchasing power as higher fuel costs drive up transportation and input expenses, leading to an overall increase in the prices of goods and services," she said.

Jigar Trivedi, Senior Research Analyst for Currencies & Commodities at Reliance Securities, agreed with Sachdeva. He warned that rising oil prices would lead to a higher dollar outflow from India, further weakening the rupee.

Iran, a key OPEC (Oragnisation of the Petroleum Exporting Countries) member, exports approximately 1.7 million barrels of oil per day. Beyond its role as a global oil supplier, Iran’s strategic location near the Strait of Hormuz — through which major Persian Gulf energy producers such as Saudi Arabia, Qatar, and the UAE export their oil—heightening the risk of global energy supply disruptions, especially as tensions escalate. Iran’s missile strike followed Israeli military action in Lebanon, including a targeted killing of Hezbollah’s chief Hassan Nasrallah, has heightened concerns of further regional instability.

Given that OPEC+ controls around 40 per cent of global crude oil supply, its policy decisions have the power to significantly influence oil prices. Sustained high global oil prices could severely impact emerging economies like India.

India is already showing signs of economic strain. The country's manufacturing Purchasing Managers' Index (PMI) dropped to an eight-month low in September, while the CAD increased slightly to 1.1 per cent of GDP in Q1 2024 from 1 per cent a year earlier, according to Sachdeva. These economic vulnerabilities heighten India's exposure to external shocks such as rising oil prices.

As the CAD widens, foreign exchange flows out of the country, leading to the rupee's depreciation. This makes imports more expensive, as India must pay more to procure the same quantity of goods. Though fuel and light have a weight of 6.84 per cent in India’s Consumer Price Index (CPI), sustained oil price hikes could push inflation higher, which in August hovered just below 4 per cent .

Data from the Petroleum Planning & Analysis Cell (PPAC) shows that India's oil import dependency rose to 87.8 per cent in financial year (FY)24 — up from 87.4 per cent in FY23 and 83.8 per cent six years ago. This growing dependence on imported crude makes India more vulnerable to global oil price fluctuations, affecting not just inflation but also the trade deficit, foreign exchange reserves, and the rupee's exchange rate.

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