• Simply told, seventeen points on the impact of an increase of crude oil prices on India’s economy and foreign policy. Important to know in the context of E20. However, BJP needs to learn how to effect change. 

Since the U.S. invasion of Iran crude oil prices headed northwards. Closure of the Hormuz Straight added to the price rise and increased uncertainty over supply. India imports app 85% of its crude requirements hence faces significant risks when prices surge.

Indian stock markets became volatile and the rupee depreciated against the $. In short, rise in crude prices added to India’s economic problems. 

This article seeks to explain how a rise in crude prices affects India. In terms of economy and geo politics. For simplicity given in point form.

1. When crude oil price rises, the dollars paid by Indian Oil Marketing Companies (OMC) and Refiners (Reliance, Nayara energy) increases. This increases demand for dollars in the foreign exchange market and impacts exchange rate.

2. Every increase in crude prices by $ 1 increases USD dollar outflow by $ 1.5 to $ 2 billion i.e. Rs 14-19,000 crs, the Current Account Deficit increases by about 0.35% to 0.5% of the GDP for every $10 increase in oil prices and Inflation rises by nearly 20 basis points for a 10% increase in overall crude prices. 1

3. OMCs continue to import crude irrespective of increase in crude price. However, the decision to increase end consumer price of petrol, diesel is taken by the Central government.

4. We often see newspaper reports of OMC losing thousands of crores, when crude prices rise but the government does not increase end consumer price.

5. No government has introduced a transparent pricing policy for petroleum products. It is thus difficult to correlate an increase in international oil prices with what the Indian consumer finally pays. The loss to Oil Marketing Companies (OMC) is notional as it is decided on the Import Parity Pricing (IPP). My 2006 article

What is IPP? It is the price an OMC pays if refined fuel (e.g. petrol, diesel) were imported from the international market, instead of refining it domestically. IPP includes International Product Price + Freight + Insurance + Port Charges + Customs Duty + Other Landing Costs. Read more Here

6. OMC fund purchase of crude and higher prices by borrowing from banks or using internal cash accruals. During UPA2, the government issued Oil Bonds.

7. The Centre increases retail prices in a calibrated manner due to volatility in international prices and fear of consumer protests.

8. When Centre compensates OMCs for losses incurred, it adds to the Fiscal Deficit, depending on how much it had budgeted.

9. If diesel price goes up, it increases truck transportation cost that adversely impacts price of just about every product. Key corporate sectors affected are Aviation, Tyres, Cements, Paints, Chemicals and Plastics and Logistics. If State Transport Undertakings do not increase ticket prices, their losses go up.

10. It increases cost of imported items used daily in households like edible oil, toiletries and a host of other products.

11. Increase in retail price leads to increase in inflation rate. If the rate exceeds the Reserve Bank of India rate change, the MPC (Monitoring Policy Committee) could increase interest rates that would make banks to increase rates for consumer and corporate borrowers.

12. Higher borrowing costs can slow domestic investment and economic growth.

Increase in interest outflow could slow Savings Rate.

13. An increase in the current account deficit means rupee depreciation, depletion of foreign exchange reserves, makes imports expensive and increases $ borrowing cost for corporates more than individuals. Reference It also affects investor confidence and credit rating.

The U.S. Iran war has exposed the weaknesses in the Indian economy. Thus, renewed call to reduce crude oil imports and undertake reforms.

However, because Indian refineries have the ability to process different types of crude, including Venezuelan, it has helped India diversity its source of crude import and possibly export refined petroleum products.

14. If cost rise for corporates, it affects their profitability/share price and attractiveness for investors.

15. Thanks to a surge in SIP (Systematic Investment Plans) the inflows into the Equity Markets has not fallen substantially. This is unlike the days when FII’s dominated the equity markets.

16. However, the equity markets have been volatile in 2026 in line with the volatility of the U.S. Iran relations.

17. India’s overdependence on crude supplies from the Middle East influenced its foreign policy for e.g. India had to accept OIC’s (Organization of Islamic Cooperation) statements on Kashmir. Read 2019 OIC and its views on Kashmir  Diversification of crude purchases has given a subtle message to the Middle East.

It is in this context that the E20 (80% petrol and 20% ethanol) has to be seen. Automakers not come clean too. Further, this BJP government has not communicated the nature of change effectively even though the need is rational.

Link takes you to my 2020 article on How can the BJP effect change

In a nation or corporate change is accepted when its need and benefits are communicated clearly. When will the BJP learn? Not responding to President Trump’s near daily tweets is good strategy but effecting change within India needs a different approach. 

Also read and References

1. Axis Direct – Impact of Rising Crude Prices on Indian Economy and Equity Markets

2. How India survived biggest Oil Shock - ORF