Tensions in West Asia and the resulting surge in crude oil prices are set to weigh on India’s economic outlook in FY27, with growth likely to moderate and inflationary pressures intensifying, according to a latest report by Emkay Global. 

The brokerage has revised its baseline assumptions, pegging Brent crude at an average of $80 per barrel, reflecting a persistent geopolitical risk premium. This has led to a downward revision in growth forecasts and an uptick in key macro indicators. 

“Elevated risks of wider energy supply disruptions from a prolonged Iran conflict prompt a reset of India’s macro realities. We shift our baseline FY27E forecast around a more realistic, yet manageable, Brent average of $80/bbl, with higher pressure in 1Q. Accordingly, we trim FY27E GDP growth by 0.4pp to 6.6% and raise inflation and CAD/GDP to 4.3% and 1.7%, respectively,” the report said. 

The impact could turn significantly more severe if crude prices remain elevated beyond current assumptions. The report warned that a sustained spike above $100 per barrel would have a disproportionate effect on macro stability. 

“A more adverse terms-of-trade shock, with Brent above $100/bbl, could push CAD/GDP beyond 2.5% and drive a BoP deficit of ~$85bn… the macro impact will be more acute and non-linear if prices average north of $100/bbl,” it noted. 

OMCs are absorbing a key part of the shock 

A key concern highlighted in the report is how the burden of higher crude prices will be distributed among oil marketing companies (OMCs), the government, and consumers. With retail fuel prices largely unchanged, OMCs are already absorbing a significant part of the shock. 

“With OMC under-recoveries (GRM-adjusted) already exceeding ~Rs3trn at current prices, the burden is likely to fall disproportionately on the government, implying a minimum fiscal cost of ~0.5% of GDP,” the report said. 

If the government were to fully shield OMCs and consumers, the fiscal impact could be even steeper. Emkay estimates that excise duty cuts and higher LPG subsidies could push the cost to over 1% of GDP, potentially crowding out other public spending. 

At the same time, passing on the full increase to consumers may not be feasible due to inflation risks and political considerations. The report suggests a shared burden as the most likely path, though it still carries economic trade-offs. 

External vulnerabilities rise 

India’s heavy reliance on energy imports from the Middle East adds to the risk. Supply disruptions through key routes such as the Strait of Hormuz have heightened concerns around availability and pricing. 

“India faces an adverse terms-of-trade shock from rising energy prices, with ~45%/55% of crude oil/gas imports from the region and limited domestic strategic reserves… a protracted conflict implies a broader supply shock, global stagflationary tail risks and heightened volatility,” the report noted. 

The knock-on effects are already visible across sectors, with rising costs of gas, fertilisers and logistics likely to feed into broader inflation and industrial slowdown. 

RBI faces limited policy room 

The central bank, meanwhile, is expected to walk a tightrope between supporting growth and managing currency pressures. While inflation risks are rising, the nature of the shock limits the scope for aggressive rate action. 

“The RBI is likely to allow calibrated INR depreciation while keeping a check on rates through market interventions. The trade-offs are not easy, nonetheless. USD/INR is set to reach 96, while the 10Y yield could drift higher and touch 6.95%,” the report added. 

Analysts also see limited likelihood of a sharp interest rate defence strategy similar to past episodes, given the supply-driven nature of the current shock. 

Prolonged geopolitical tensions may quickly alter trajectory

While oil prices around $80 per barrel remain manageable, the report cautions that prolonged geopolitical tensions could quickly alter the trajectory. The longer the conflict persists, the higher the risk of a sharper hit to growth, inflation and external balances. 

In the near term, policymakers may have to balance inflation control, fiscal discipline and growth support, with limited room for error as global uncertainties continue to rise.