Crude oil prices and geopolitics: Is India prepared for the inflation shock?

Talotma Lal | June 18, 2025

A sharp escalation in the Israel-Iran conflict has pushed Brent crude oil prices up by 15–16% since May, stoking fresh concerns over inflationary pressures in India. However, analysts remain cautiously optimistic, citing an oversupplied global oil market and Saudi Arabia’s ample spare capacity as stabilising factors.

While the Reserve Bank of India (RBI) is keeping a close watch on developments, falling retail inflation—down to a 75-month low of 2.82% in May—suggests the immediate impact on the inflation trajectory may be limited.

The ongoing conflict between Israel and Iran has led to a notable rise in international crude oil prices, prompting concerns about inflationary pressures in India. Brent crude prices have risen by US$4-5 per barrel since the latest round of escalation and have increased nearly 15–16% since the end of May. This uptrend has been largely attributed to geopolitical tensions in the Middle East, especially concerns over a potential disruption in Iran’s oil exports, which account for approximately 1.5–2 million barrels per day of global supply.

Bloomberg data shows that Brent crude oil prices rose to US$ 69 per barrel last week during heightened Middle East tensions and currently stand at US$ 74 per barrel. In contrast, prices were at US$ 65.41 per barrel in May.

Economists traditionally estimate that a US$ 10 increase in oil prices typically contributes 0.4%–0.6% to consumer price inflation (CPI). In this context, the RBI has been closely monitoring the situation, as higher oil prices can feed into inflation through higher fuel and transportation costs. Further as a rule of thumb, analysts estimate that every US$ 10 per barrel rise in crude oil adds roughly 35 basis points to CPI inflation on an annualised basis.

According to analysts, the recent stability in crude oil prices could help ease concerns about inflation. They believe that the recent spike in prices was a knee-jerk reaction to the Middle East conflict and expect a gradual de-escalation, which would likely bring prices back to pre-tension levels. As a result, the impact on consumer price inflation (CPI) is expected to be limited. They also highlighted that the global oil market is currently oversupplied by 1–2 million barrels per day. Additionally, Saudi Arabia’s spare production capacity of around 2 million barrels per day is likely to cushion against any sharp rise in prices.

Meanwhile, the fear of a significant supply shock — such as Iran blocking the Strait of Hormuz, a critical shipping route that handles 20% of the world’s oil and LNG — is considered unlikely. The strait has remained operational even during earlier crises, and Western nations are expected to intervene to prevent a blockage. This view reinforces the belief that Brent crude prices are likely to remain range-bound between US$ 70 and US$ 80 per barrel in the near term and may settle around US$ 70 once tensions ease.

Despite the global uncertainty, India’s inflation outlook remains stable. Retail inflation has declined steadily in recent months, with May recording a 75-month low of 2.82%, down from 3.2% in April. The RBI has also revised its inflation forecast downward for FY26 to 3.7%, citing continued disinflationary trends. Some economists even project a lower average inflation of 3.3%–3.4% for FY 26, provided crude oil prices do not rise sharply and remain within manageable limits. The central bank, while cautious, has not altered its forecast yet, though it remains watchful of oil price movements and geopolitical risks.

As per a report by the Global Trade Research Initiative (GTRI), the Indian government should reassess its energy risk strategy, diversify crude oil imports, and build up strategic oil reserves. With India depending on imports for 85% of its oil needs, any sharp rise in prices could significantly strain public finances by increasing import costs and fuel and fertiliser subsidy bills. This could limit spending on welfare programs, widen the current account deficit, weaken the rupee, and slow GDP growth.

Prolonged high oil prices may also trigger broader inflationary pressures. The severity of the impact depends on how long prices stay elevated. An inflation spike could derail India’s short-term economic outlook, especially as the Reserve Bank of India (RBI) has eased interest rates following declining inflation and may cut them further. Higher energy costs could fuel inflation, suppress consumption, reduce business margins, and dampen overall demand.

However, analysts believe that market fundamentals and the potential for de-escalation may help contain inflation, though the RBI is expected to remain watchful. Virat Bahri, Joint Director – Research, TPCI, comments, “The RBI’s inflation management strategy looks robust, and the moderation in CPI offers policy room. However, any sustained rise in oil prices could complicate monetary policy, especially at a time when rate cuts are under consideration to spur growth.”

Crude oil prices and geopolitics: Is India prepared for the inflation shock?

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Crude oil prices and geopolitics: Is India prepared for the inflation shock?

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