Its crude oil import bill rose 48% to US$ 91.52 billion in the first half of the current financial year from US$ 61.87 billion in the corresponding period last year. Does this mean India is buying more crude oil? The answer is no.

The Brent crude price has once again crossed the psychological mark of US$ 100 a barrel and is currently trading around US$ 115 a barrel over concerns of supply disruptions following re-escalation of conflict in West Asia.

The recent spike in international crude oil prices has created fresh challenges for policymakers struggling to contain inflation, maintain macroeconomic stability, and sustain the robust growth rate of 7.8% recorded in the first quarter of the current financial year.

For India, which is the world’s third-largest oil-consuming nation after the US and China, the consequences extend far beyond petrol and diesel prices at the pump. Expensive crude increases the country’s import bill, raises dollar demand, weakens rupee, and transmits inflationary pressures across the economy. It increases government expenditure on one hand and reduces the purchasing power of households on the other.

India imports more than 90% of its total fuel requirements.

Small wonder that External Affairs Minister S. Jaishankar has been repeatedly underlining the need to watch out for the “4 F” crises – finance, food, fuel, and fertiliser. 

“The Global South today faces a 4F crisis of finance, fuel, food, and fertilisers. The Global North must realise that it has equal stakes in finding solutions,” he reiterated on Sunday at an event marking the 75th anniversary of the Chinmaya Mission. 

More Dollars For Same Crude

India’s vulnerability is evident from its dependence on imported crude oil and petroleum products. Import volumes remained broadly unchanged in the April-September at 123.29 million tonnes, as compared to 121.8 million tonnes during the six months of the previous fiscal, as per the data compiled by the Petroleum Planning and Analysis Cell (PPAC).

The increase in crude oil imports in volume terms works out to be less than 1.3%. The higher outgo of foreign exchange was driven by rising prices in the international market since the beginning of the conflict in West Asia in February. 

As a result, the average price of the Indian crude basket nearly doubled to US$ 121.25 a barrel in October, compared to US$ 65.08 a year earlier. This sharp escalation points to the impact of geopolitical shocks on India’s energy security.

The immediate impact of rising crude prices in the international market is on the external sector, as more dollars are needed to purchase the same volume of energy, widening the trade deficit and putting pressure on the current account.

According to an International Monetary Fund (IMF) assessment, “an increase in oil prices by about US$ 10/bbl, sustained for a year, adds about 0.4% of GDP to the Current Account Deficit (CAD).”

Indian Rupee Becomes More Vulnerable

Higher crude prices have a telling impact on the value of domestic currency and foreign exchange reserves.

Greater demand for dollars weighs on the value of the rupee, particularly when Foreign Institutional Investors (FIIs) are withdrawing funds and foreign capital inflows are insufficient to offset the additional demand.

The domestic currency has weakened significantly against the greenback since January 2026. From around ₹89.97 per dollar at the beginning of January, it depreciated to a record low of approximately ₹96.98 on May 20, marking a decline of nearly 7.8%. It later recovered to around 94.94 a dollar after the Reserve Bank of India (RBI) intensified efforts to arrest the declining value of the currency.

These efforts include selling dollars in spot and non-deliverable forward markets, opening a special dollar window for state-owned oil refiners, tightening foreign-exchange derivative and hedging rules, and imposing reserve requirements on large hedge transactions. The central bank also raised the benchmark repo rate by 25 basis points to 5.5% and mobilised about US$ 150 billion through FCNR(B) deposit and swap measures.

The foreign exchange reserves, however, fell by US$ 64.69 billion, from a record high of US$ 785.71 billion on 4 September 2026, to US$ 721.02 billion in the week ended 16 October 2026.

The Reserve Bank can intervene to smoothen excessive currency volatility, but intervention cannot permanently offset a deterioration in the terms of trade. The durable solution lies in increasing domestic energy production, promoting exports, and attracting foreign investments.

Impact On Inflation And RBI’s Dilemma

Petrol and diesel prices affect household budgets directly, but their wider economic significance lies in the impact on the cost of transportation and production.

Diesel is a major input for freight movement, agriculture, construction, and goods distribution. Higher fuel costs can consequently increase prices of vegetables, foodgrains, manufactured goods and other everyday necessities.

Industries that depend on petroleum derivatives, including paints, chemicals, plastics, fertilisers, and synthetic textiles, can also face higher input costs. Airlines confront increased aviation turbine fuel expenses. Logistics companies and smaller manufacturers too are impacted as they have limited room to absorb sustained cost increases.

For the RBI, which is mandated to keep retail inflation at 4% with a margin of 2% on either side, a sustained rise in oil prices complicates monetary policy action. Higher interest rates to counter a supply-driven inflation weaken consumption, while ignoring persistent price increases could fuel inflationary expectations.

RBI Governor Sanjay Malhotra has said that, “inflationary pressures are… building up. Headline CPI (Consumer Price Index) is projected to touch the upper tolerance band (of 6%) in Q3 and remain significantly above 5% in the next two quarters.”

The Difficult Choice

The union government too faces a similar dilemma.

Allowing retail fuel prices to reflect international costs would protect the finances of oil marketing companies, but it could increase inflation and place an additional burden on households and businesses.

Alternatively, the government can reduce excise duties or use other fiscal measures to limit the passthrough. Such steps may offer immediate relief to consumers but would reduce public spending towards infrastructure, welfare programmes, and overall economic development.

Oil marketing companies are particularly exposed to rising crude prices. If they do not pass higher input costs to consumers, their marketing margins shrink. Persistent under-recoveries may result in losses requiring government support, burdening the exchequer.

Airlines, transport operators, petrochemical manufacturers, and other energy-intensive businesses too face cost pressures. 

Challenges For Policymakers

The immediate challenge for policymakers is to prevent the geopolitical oil shock from further fuelling domestic inflation. 

CPI or retail inflation has edged up and the September print at 5.54% is very close to the RBI’s upper tolerance band. The Wholesale Price Index (WPI) during the month was in double digits at 11.39%, indicating the mounting price pressures across the economy.

A brief price spike in crude may be manageable, but a sustained period of crude above US$ 100 a barrel would be much more consequential, particularly if accompanied by a weaker rupee and disruptions in physical supplies.

According to a Reserve Bank analysis, “a 10% increase in international crude oil prices could raise India’s headline inflation by around 20 basis points on a contemporaneous basis.”

The policymakers, it added, “need to be vigilant and cautious of the direct and indirect impact of the evolving global crude price dynamics through continuous assessment, given India’s increasing dependence on crude oil imports and a persistent demand-supply gap.” 

The policymakers are required to draw a difficult balance between consumer relief, fiscal discipline, and the financial health of energy companies.

“India’s external balance… remains a concern. The balance of payments shows some vulnerabilities, particularly given the tight global financial environment. At the very least, maintaining a certain gap between India and G7 interest rates is important for attracting debt capital flows. At the same time, too rapid a policy rate adjustment risks constricting growth and hence growth-led capital flows,” opined Saugata Bhattacharya, member of the RBI’s Monetary Policy Committee.

India cannot control the geopolitics of West Asia or the global oil market. It can, however, reduce the extent to which those developments influence domestic inflation, the rupee, and economic growth.