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Brent crude oil prices rose nearly 2% to $78.53 a barrel as the US and Israel attacked Iran’s nuclear facilities, impacting India’s economy with inflation and rupee depreciation.
In international markets, Brent crude futures jumped to their highest level since January.
Brent crude oil prices jumped nearly 2% to $78.53 a barrel on Monday to touch the highest level since January, as the US joined Israel in attacking Iran’s nuclear facilities, raising oil supply concerns from the region. Iran’s parliament’s approval to close the Strait of Hormuz, a crucial maritime route that facilitates nearly 20% of global oil and LNG shipments, further supported the oil price rise.
In international markets, Brent crude futures jumped to their highest level since January. Brent gained $1.88, or 2.44%, to $78.89 a barrel (as of 11:22 GMT), while US West Texas Intermediate (WTI) rose $1.87, or 2.53%, to $75.71, according to Reuters.
From the Indian economy’s point of view, crude oil price fluctuations due to the ongoing West Asian tensions is a key concern.
Here’s How Rising Oil Prices Impacts Indian Economy
India meets 85% of its crude oil needs through imports and thus rising global crude oil prices have far-reaching consequences for the country. According to a Reuters report citing latest government data, India’s crude oil imports reached a record 23.32 million metric tonnes in May, up 9.8% month-on-month.
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The country is the world’s third-largest importer and consumer of oil, reflecting the broader economic and industrial activities driving it. As a major oil-importing nation, India’s macroeconomic indicators are sensitive to fluctuations in international oil prices. When crude oil prices rise, it affects the country’s inflation, fiscal deficit, current account balance, and even household budgets.
1. Inflationary Pressures
One of the most immediate impacts of rising crude oil prices is higher inflation. Crude oil is a key input in the production and transportation of goods and services. An increase in oil prices leads to higher fuel costs — such as petrol, diesel, and LPG — which in turn drives up the cost of transportation, manufacturing, and essential commodities. This leads to higher wholesale price inflation (WPI) and consumer price inflation (CPI).
Currently, India’s retail inflation stands at 2.82%, as per the latest data available for May 2025.
2. Widening Fiscal Deficit
India subsidises fuels like LPG and fertilisers to protect consumers, particularly the poor, from sudden price shocks. When global crude prices rise, the government may need to increase subsidy allocations or cut taxes (like excise duty on fuel) to shield consumers. These measures lower revenue or increase expenditure, putting pressure on the fiscal deficit, which is the gap between government spending and revenue. A higher fiscal deficit can lead to borrowing, pushing up interest rates and potentially crowding out private investment.
Currently, India’s fiscal deficit stands at 4.8% of the GDP or Rs 15.77 lakh crore, as of May 30, 2025. This is already 100.5% of the revised annual target for FY26.
3. Impact on Current Account Balance
The current account deficit (CAD) — the difference between the value of imports and exports — worsens when oil prices rise. Since crude oil constitutes a significant portion of India’s imports, higher prices result in a bigger import bill. If export growth does not keep pace, the current account deficit widens, putting downward pressure on the rupee and weakening investor confidence.
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Currently, India’s current account deficit (CAD) rose marginally to $11.5 billion, or 1.1 per cent of gross domestic product (GDP), during the October-December 2024 quarter. The rise in crude prices might further increase CAD prices.
4. Rupee Depreciation
Higher crude oil prices increase dollar outflows to pay for imports, raising the demand for US dollars and causing the Indian rupee to weaken. A weaker rupee further raises the cost of oil imports, creating a vicious cycle of imported inflation. Rupee depreciation also makes other imports more expensive and can discourage foreign investment if macroeconomic stability is seen as threatened.
The Indian rupee on June 23, Monday, declined 17 paise to 86.72 against the US dollar in early trade, as global crude oil prices surged following the US’s attack on three nuclear facilities in Iran.
5. Reduced Consumer Spending
Rising fuel prices directly impact households by increasing monthly expenses on transportation and cooking. As fuel eats up a larger share of income, discretionary spending — on items like dining out, entertainment, and apparel — tends to shrink. This affects consumer demand, especially in urban areas, and hits sectors like retail, travel, and FMCG.
Haris is Deputy News Editor (Business) at news18.com. He writes on various issues related to markets, economy and companies. Having a decade of experience in financial journalism, Haris has been previously asso…Read More
Haris is Deputy News Editor (Business) at news18.com. He writes on various issues related to markets, economy and companies. Having a decade of experience in financial journalism, Haris has been previously asso… Read More
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