Falling crude prices could ease forex outgo, cut fiscal deficit and tame inflation

Amid escalating fear of the Trump tariffs, the Indian economy is finding solace in falling crude prices. The Brent crude price has fallen to $70.58 a barrel from the last one-year peak of $91.2 in April last year. The shrinking crude prices will restrict the country's foreign exchange outgo, reduce fiscal deficit and retail inflation as the country imports around 85% of its annual oil requirement.

In addition, the crude purchase bill of Indian refiners like Reliance Industries (RIL), Indian Oil Corporation, Hindustan Petroleum Corp and Bharat Petroleum Corp will sharply come down. If they are able to increase the share of high-value products in their basket, it will help in improving the gross refining margin (GRM).

According to the International Energy Agency (IEA), the global crude oil supply could exceed demand by around 6 lakh barrels per day (bpd) this year, after a downward revision to its 2025 demand growth forecast. The agency said in its monthly oil market report that the surplus crude could grow by a further 4 lakh bpd if OPEC+ sticks to overproduction to maintain its market dominance.

Geopolitical events have a significant impact on crude prices, and India is at the receiving end because the country is the second-largest crude importer after China. The high crude prices directly affect India's forex outgo. The impact will be multiplied when the rupee continues in the weaker zone against the US dollar.

In the last five years, the rupee has depreciated 15% against the dollar. Partially due to this reason, in the April-December 2024 period, the country’s crude import bill increased by 3.7% to $102.5 billion, as against $98.8 billion in the same period in FY24, according to Petroleum Planning and Analysis Cell data. The country imported 179.3 million tonnes (MT) of crude oil in this period compared to 173.7 MT in the previous nine months.

If the government passes on the benefits of falling crude prices to fuel customers, it will boost automobile sales. The Society of Indian Automobile Manufacturers earlier said that the falling fuel prices will drive auto sales ahead. High fuel prices increase the cost of essential goods and affect consumer spending. It will, in turn, have a huge impact on the government's income from excise duty. The falling crude price helps steel and cement manufacturers reduce their input costs. However, the low crude price doesn’t augur well for oil exploration and production companies like ONGC, RIL (KG Basin) and Cairn India as their crude production will be priced lower in tune with global prices.

The government had in the past reduced central taxes multiple times to lower consumer prices of petrol, diesel and LPG. However, it is no longer an option for the government as it has been struggling to bridge the fiscal deficit gap and control the rising inflation. The Indian government targets a narrower fiscal deficit of 4.4% of gross domestic product for FY26, down from a revised 4.8% for the current year.

India’s retail inflation eased to a seven-month low of 3.61% in February, down from 4.31% in January, thanks to lower food prices. The food inflation—comprising nearly half of the Consumer Price Index (CPI) basket—fell to 3.75% in February from 5.97% in January. Food inflation in February 2025 was the lowest since May 2023. The further reduction in crude prices will continue to support the government in bringing down retail inflation.