Seven months into the conflict in West Asia, the risks around the Strait of Hormuz continue to hold the world’s oil supply hostage. On 24 September, the Indian crude basket climbed to $123.67 a barrel. For a country that imports most of the crude it uses, this should be alarming. Yet at a petrol pump in Delhi, the shock is imperceptible, with petrol costing ₹102.12 a litre and diesel ₹95.20, where prices have held since a series of small increases in May. The wider economy looks just as calm: retail inflation, at 4.82% in August, sits comfortably within the Reserve Bank of India’s (RBI) tolerance band of 2 to 6%.
But this calm comes at a price. The shock has not been cancelled, only deferred, and for now it is the oil companies and the government that are absorbing it. Public sector oil marketing companies are losing about ₹530 crore a day, according to the rating agency ICRA. That is roughly ₹8 on every litre of petrol, ₹9 on every litre of diesel and ₹300 on every domestic LPG cylinder they sell. Their accumulated losses on LPG alone had reached ₹61,940 crore by the end of June. The Centre, meanwhile, cut the excise duty by ₹10 a litre in March, leaving just ₹3 a litre on petrol and nothing on diesel, at an estimated cost of ₹1.5 to 1.7 lakh crore a year. Neither can sustain. Oil companies cannot keep selling below cost, and the government has little excise duty left to cut. Sooner or later, some of the cost will have to reach consumers. The real question is how much, and what it would mean for inflation.
To answer that, I estimate how inflation would respond under different degrees of pass-through. My estimates assume that the Indian crude basket stays around $120 a barrel until December and climbs to $140 between January and March 2027. Starting from the RBI’s pre-war inflation forecast of 4.5% for 2026-27, I add the effect of costlier fuel, both directly through what households pay for petrol, diesel and cooking gas, and indirectly through higher transport and production costs, and everything else that feeds into the prices of other goods and services. If pump prices stay close to current levels, with one modest increase in October, inflation averages about 5.5% for the fiscal year, within the RBI’s upper limit of 6%. If half the rise in crude reached consumers, it would be about 6.6%; if all of it did, about 8.4%. In other words, every $10 rise in crude adds about 0.8 percentage points to inflation when it is fully passed on to consumers, but only about 0.15 points at present, since consumers bear less than a fifth of the increase. Moreover, the pent-up adjustment is already significant: closing the oil companies’ current losses on petrol and diesel alone would add roughly 0.65 percentage points to inflation.
The inflationary impact of higher pump prices will not remain confined to fuel. By my estimates, about a third of fuel-driven inflation works through indirect channels, as higher energy costs feed into the prices of other goods and services. Diesel is the principal conduit. Its direct weight in household consumption is small, but it underpins freight and logistics across the economy, so its indirect effect on prices is roughly six times its direct effect.
Commercial LPG, priced at ₹2,747.50 for a 19-kg cylinder in Delhi, raises input costs for restaurants and small enterprises, which are likely to pass them on. For lower-income households, the adjustment is already under way. A domestic LPG cylinder costs ₹942 in Delhi. Beneficiaries of the Ujjwala scheme, which covers more than 10 crore connections, pay ₹642 after a ₹300 subsidy, but since June the subsidy has been restricted to four cylinders a year rather than nine. For a household that needs nine, this means an additional ₹1,500 a year, a significant erosion of disposable income that may push some families back towards traditional solid fuels. As these pressures accumulate, real incomes will weaken and discretionary spending is likely to be deferred. That poses a risk to private consumption, the largest component of GDP, at a time when the RBI’s growth projection of 6.7% for this year depends heavily on it.
The shock is also transmitted to India’s external balance. The current account deficit was 0.6% of GDP in 2025-26 and 0.5% in April–June 2026, contained by robust remittance inflows of $42.9 billion in the quarter and resilient services exports. My estimates, however, suggest that the net oil import bill could rise to about $172 billion in 2026-27, widening the current account deficit to between 1% and 1.9% of GDP. The outcome hinges largely on whether remittances sustain their recent momentum, a considerable share of which originates in the Gulf, the region at the centre of the conflict. With foreign portfolio investors having withdrawn $9.6 billion in April–June, the financing burden shifts to the rupee, which has already weakened past 95 to the dollar. Further depreciation would, in turn, raise the rupee cost of oil imports and add to domestic inflationary pressure.
Freezing prices is a reasonable response to a short disruption. This one has lasted seven months, and oil prices remain elevated, hence the policy must now prepare for a prolonged shock.
A few measures merit consideration. The first is a shift from prolonged price freezes to small, predictable revisions, which households absorb more easily than a sudden jump and which prevent losses from accumulating. The second is better-targeted support: at about ₹12,000 crore a year, the Ujjwala scheme protects the poorest at a fraction of the cost of holding prices down for everyone. The third is a clear rule for restoring excise duties once crude eases, as each ₹1 a litre is worth roughly ₹14,000 to 16,000 crore a year in revenue. Over the longer term, India would do well to expand its oil reserves, which currently cover about seven to eight weeks of demand, broaden its base of suppliers, and continue reducing its reliance on oil through ethanol blending, electric mobility, public transport and freight rail.
By absorbing the shock rather than passing it on, India has bought time, but not immunity. The cost has merely been redistributed: to the balance sheets of oil marketing companies, to the Centre’s fiscal accounts and to the country’s external position. The question, therefore, is not whether India will pay for this oil shock, but when, how and by whom. An adjustment that is planned, gradual and early will cost far less than one that markets eventually force.