The current oil crisis is the fourth in the last four years. The first episode took place when Russia invaded Ukraine which saw crude price moving from around $84/barrel in February 2022 to $117 in March and remaining in a higher range till September, when it moderated to $90/barrel before reverting to around $80/barrel in December.
Therefore, the higher prices lasted for almost nine months. In this episode, Russia was a major supplier of oil (third largest with share of 10-12 per cent). With a ban being imposed on imports by the western community, supplies were disrupted.
The second was the Israel-Palestine conflict in October 2023 but its price impact lasted for just about a month. This is because no oil producing country was involved in this conflict.
The third was a short lived war where the US and Israel attacked Iran in June 2025. Here too, the price impact was limited as Iran is not really a major supplier of oil to the world, with its share in global output at around 4 per cent and sanctions still in place.
The present war is different. To begin with, almost all the oil producing countries in West Asia are embroiled in this conflict, impacting production of oil and gas. Further, while Iran has not officially closed the Strait of Hormuz, ships will not sail through this passage, given the risks involved.
So, there has been greater disruption to the oil industry with shipping costs also going up for all goods passing this region. Significantly, an early end to the war looks unlikely. Ukraine has managed to hold on for four years now.
Impact on India
India imports around five million barrels a day which works out to around $180 billion (1.8 billion barrels annually) a year. Hence, if the price remains high for the entire year, for every $10 dollar increase in the price of oil, the import bill be up by $18 billion.
This can lead to an increase in current account deficit by 0.5 per cent of GDP, which should not be a serious issue for India as the balance is fairly comfortable today in the region of 1-1.5 per cent. Exports, however, would be impacted as petro-products are around $65-70 billion per annum, of which 15 per cent is headed to these vulnerable regions.
The immediate impact has been felt on the currency with the rupee crossing the psychological level of ₹92/$. It is likely to see increased volatility. This market will witness increased volatility. First, the US dollar will also be volatile with a possible tendency to strengthen. The Fed will hold the reins here.
Second, any news on oil and gas supply disruption will spook the rupee. Third, FPI flows will remain uncertain. While the India growth story will bring in the funds, the rupee volatility will lower potential returns. This can be a deterrent.
Fourth, the behaviour of exporters and importers will also hold a clue. In times of uncertainty, exporters hold back earnings, while importers may rush in to buy dollars, exacerbating the demand-supply situation. Lastly, RBI action in the coming days will be important as intervention in the market can quell speculative forces and bring in stability.
Limited growth impact
Concerns over growth may be less serious. While supply disruptions will cause problems to user industries such as fertilizers, chemical products among others, a decline in exports can also dent growth in GDP at the margin. The overall impact may not be more than 0.1-0.2 percentage points but would need monitoring for secondary effects of the war. The supply disruptions of gas and their impact on user industries will be more of an issue.
Inflation is likely to be under control unless the government decides to pass on the higher price of crude to the consumer, which has rarely happened.
When crude prices stayed low, the benefit did not go the consumer but to the OMCs. Higher crude prices may not hence lead to an increase in retail prices in the near future as this can be absorbed by the OMCs.
In fact, given the fragile global oil situation over the last four years, it may make sense to transfer all future surpluses to an emergency fund that can be used in times of crisis.
Further, OMCs do buy oil based on contracts struck with suppliers where the price formula is worked out in advance. Therefore, the increase seen today in the market may not be the price which is finally paid and would be lower. Also, hedging practices are pursued to cover for price risk to an extent.
The government would be monitoring the situation carefully. There are a few issues that merit attention. The first is whether anything can be done on excise duty or VAT (by States)if prices rise further.
Second, the subsidy element is low today on LPG which is not an issue. In fact, the price has been increased recently to partly offset the higher cost. But supplies are a concern on which a policy has already been indicated to ensure that essential services are not affected. Third, fertilizer prices need to be watched carefully as they affect the subsidy level as well its availability.
The stock market would continue to display yo-yo movements reflecting sentiment on a real time basis and hence will be hard to predict in the short run. This will be the case with global indices, too.
Last, the bond market has not been affected much. While forex intervention will draw out liquidity, the RBI has already announced OMOs which will be reassuring for the market.
Therefore, the length of the war will hold the clue to the final outcome. The government and RBI are seized of the matter and would take the appropriate steps to mitigate the risks. But markets for sure, will remain volatile.
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