West Asia crisis: Falling rupee, rising crude oil prices could change Budget math

The West Asia crisis has thrown up fresh challenges for India including the pressure from a fast depreciating currency and elevated oil prices that could impact fiscal calculations.

"As of now, the hope is that the war will end soon and at least oil supplies will revert back to normal. But there is need to be watchful over the situation," said a source close to the development, noting that not only the trade deficit and balance of payments but also the fertiliser subsidy bill and fiscal deficit could be impacted by a prolonged war.

India has been keeping a close watch on the developments in West Asia amidst the US, Israel and Iran war that has had repercussions all over the region and has impacted oil and gas supplies to much of the world, including India.

While there are reasonable stocks of oil and natural gas and India has also secured Russian oil supplies, the challenge is that oil prices have also risen due to the crisis. Coupled with the depreciating currency, this could impact almost all projections made in the Union Budget 2026-27, the source noted.

For now, the finance ministry is monitoring the situation, but sources indicate that there is no cause for alarm yet. The Budget, presented on February 1, had expressed confidence that the economy would be resilient and continue to grow due to domestic growth boosters and had seen only the US tariff as one of the key challenges.

The Indian rupee breached the 92 mark against the US dollar on March 4 and touched an all-time low of 92.8, but has since rebounded. Brent crude oil price has also surged to over $80 per barrel. The average price of the Indian crude oil barrel has risen to $85.43 per barrel in March from $63.08 in January and $69.01 in February.

Bank of Baroda economists in a webinar said that while the conflict does not pose any immediate concerns for India, in the long run, its impact cannot be overlooked from the point of higher oil import bill, pressure on current account deficit and the long-term impact of the adverse supply shock on growth.

For every 10% increase in oil prices on a permanent basis, oil imports are likely to inch up by $18 billion or 0.5% of the GDP. “This will get reflected in higher current account deficit,” they said. There would also be an increase in fertiliser and petroleum subsidy bill in FY27 if the rates of LNG and oil go up and OMCs absorb the increased cost.

"We believe the result from these standard simulations to be extremely muted till oil price averages under $ 80 per barrel in FY27 ( versus FYTD average of $ 68 per barrel) as the economy’s energy intensity has evolved, while fiscal policy could be in a position to partially accommodate the shock," said a report by Quanteco Research. It however, noted that movement of crude oil price towards $90 per barrel levels on a sustained basis could create asymmetric impacts, with the BoP reflecting the primary fallout, followed by inflation, growth, and fiscal policy. In such a case, the agency expects India’s GDP growth and CPI inflation at 6.5% and 4.5% respectively, accompanied by a BoP deficit of $30 billion.  

"This adverse macro combination could result in INR weakening towards 97, while the 10Y sovereign yield could touch the 7% mark," it warned.