Iran-Israel tensions roil oil markets; concerns mount in India Inc over economic fallout

The surge in crude prices following Iran-Israel battle is raising concerns across India’s industrial landscape as it would challenge corporate cost management and unsettle the broader economic outlook. For companies in oil refining, petrochemicals and paints, the sharp price swings are making hedging strategies both expensive and unreliable. Automobile, cement and power firms will have knock-on effect if brent crude moves above $80, say experts.

On Friday, oil prices shot up over 7% after Israel began bombing Iran over claims that Tehran would secure atomic weapons. But it fell $1 per barrel in the early trade on Monday before increasing by over a dollar in the closing trade. The Brent crude fell 1.3%, to $73.3 in the early trade on Monday before it bounced to $74.5. It had increased to $78 a barrel last week.

Brent crude — the global benchmark — has fluctuated between $58 and $81 per barrel over the last one year. Though its lower considering the above $140 a barrel price during the beginning of Russia-Ukraine War in 2022, the instability, driven by geopolitical disruptions, supply chain constraints and global demand slackening, has caught businesses off guard. In addition, the steep spike in prices give sleepless nights to policy makers as economy at large is contending inflationary pressures, a weakening rupee, rising foreign capital outflows, and threats to GDP growth.

For oil refining companies like Reliance Industries, Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum, which import volumes of crude for processing and producing petrochemicals, volatility has introduced considerable amount of margin risk into their operations. According to Reliance's last year annual report, the company enters into various transactions using derivatives and uses over-the-counter as well as exchange traded futures, options and swap contracts to hedge its crude and freight exposure.

However, the unpredictable price fluctuations increase their premiums and reduce the effectiveness of such strategies. This force many refiners to operate with lower hedging coverage, raising their financial exposure by buying from spot market. "The cost of locking in crude future prices increased sharply with the spike in prices and sudden reversals. This could turn a hedge into a loss," said a company insider from trade desk. If the price is steady though its high, the refining companies can find ways to pass it on to consumers, said a Mumbai-based banker.

Oil prices affect input costs of cement producers which use petcoke and furnace oil to fire their kilns. Paint manufacturers are in similar predicament as solvents, pigments, and other crude-linked inputs form a significant part of the raw material basket for companies like Asian Paints, Birla Opus and Kansai Nerolac. The paint makers have limited room to raise product prices amid softening demand. Feedstock volatility is making it harder for chemical companies to forecast their margins. Many inputs are directly linked to crude. The rising crude prices also reflects on automobile mobile sales numbers.

India’s economy is largely exposed to the consequences of rising crude prices as the country imports more than 85% of its requirements. A sudden spike in prices increases foreign capital outflow, widens fiscal and trade deficit, putting pressure on the current account.

Another trouble is that the falling rupee makes oil imports even more expensive, feeding back into the cycle of inflation. The rupee has weakened steadily, breaching the 86 mark against the US dollar despite sporadic intervention by the Reserve Bank of India (RBI). Transportation, power, and manufacturing took a hit due to rupee depreciation.

Consumer price index (CPI) based inflation, which eased to 2.82% in May due to decline in food inflation will see a reversal if crude price moves up. Higher energy costs can also dampen consumption and investment, putting pressure on GDP growth. The World Bank has recently cut the growth forecast for India to 6.3% in FY26 from the 6.7% that it projected in January, citing dampened export and investment growth.