Oil at $100: How strong are India’s economic fundamentals

• Crude above $100 tests India’s growth amid Middle East tensions.

• IMF lifts FY2026 growth forecast to 6.5%; S&P sees resilience.

• Oil shock may widen current account deficit, weaken rupee, raise inflation.

• Fiscal deficit risks breaching 4.3% due to subsidies and tax cuts.

• Corporate earnings may dip, but balance sheets remain stronger than past cycles.

• Banks well-capitalized; external position offers key cushion.

India’s run of strong growth and relatively subdued inflation is facing a serious test as crude oil prices surge past $100 per barrel in the wake of escalating tensions in the Middle East and the ongoing US-Iran conflict. The spike has unsettled global markets and cast a shadow over growth prospects worldwide. For India, which depends heavily on imported energy, the shock presents clear risks.

Yet, despite the turbulence, leading global agencies maintain that India’s macroeconomic foundations are sturdy enough to navigate the disruption.

IMF Raises Growth Outlook Despite Turbulence

In its April 2026 World Economic Outlook, the International Monetary Fund revised India’s growth projection for the current financial year upward to 6.5%. The upgrade reflects the carryover impact of last year’s robust expansion and the easing of US tariffs, factors the IMF believes will outweigh the drag from geopolitical instability.

S&P Global echoes this cautious optimism. In its recent assessment titled India's Strong Fundamentals Would Cushion The Blow Of An Oil Shock, the ratings agency argues that India has the capacity to absorb significant strain, even under adverse conditions.

India Still Poised to Lead Growth Rankings

S&P’s baseline scenario assumes average oil prices of $130 per barrel in 2026, easing to $100 in 2027. This outlook factors in a peak in hostilities and a gradual reopening of the Strait of Hormuz, though lingering supply disruptions could continue for months.

Even under these assumptions, India is expected to remain the fastest-growing major economy, albeit with some moderation in pace.

How the Oil Shock Ripples Through the Economy

The impact of higher crude prices extends well beyond the fuel pump. S&P outlines four primary transmission channels through which the shock would affect India:

• A widening current account deficit

• Rising production costs that compress corporate margins

• Higher consumer prices that erode purchasing power

• Increased fiscal pressure as the government steps in with subsidies

Oil’s significance across sectors—especially in chemicals and petrochemicals—means alternatives cannot be deployed overnight. Disruptions could even lead to shortages in fuels, fertilizers, and related downstream products, potentially slowing economic activity.

Pressure on External Balances and the Rupee

A sustained $10 increase in crude prices typically widens India’s current account deficit by about 0.4 percentage points of GDP, according to estimates cited in the report. With import bills swelling, the external balance is expected to deteriorate.

The rupee, already down roughly 3% since the start of the year, could face additional depreciation if global investors turn risk-averse.

For households, the consequences are tangible. Rising input costs eventually filter through to retail prices, squeezing real incomes. If the government absorbs part of the burden by cutting excise duties or expanding subsidies, fiscal consolidation plans may be delayed. S&P warns that measures such as fuel tax reductions and higher fertilizer subsidies could push the fiscal deficit beyond the 4.3% target for the year.

Still, the agency believes these pressures will not fundamentally derail India’s longer-term commitment to fiscal discipline. Any monetary tightening by the Reserve Bank of India, should inflation rise, is expected to be measured rather than aggressive.

Corporate India: Stress, But Not Crisis

Corporate earnings are likely to take a hit if high energy prices persist. In a stress scenario, S&P estimates that EBITDA for around 100 of India’s largest firms could decline by 15% in fiscal 2027 and 10% in fiscal 2028 compared with earlier projections.

Should disruptions last six months, lower capacity utilization could push leverage ratios up by about one turn of EBITDA in fiscal 2027. However, a rebound is anticipated in fiscal 2028, with earnings recovering to fiscal 2026 levels.

Importantly, companies enter this phase with stronger balance sheets than in previous crises. Over the past five years, earnings for major corporates have climbed nearly 50%, while debt has increased only modestly. Proactive refinancing and comfortable liquidity positions reduce the risk of near-term funding stress.

Sector-wise exposure varies:

• Most vulnerable: chemicals, refining, and airlines

• Also at risk: cement, steel, metals and mining, and automobiles

• Pharmaceuticals: potential margin pressure but supported by low leverage

• Infrastructure: relatively insulated

• Utilities: able to pass higher coal costs to consumers

• Airports: sensitive to reduced passenger traffic if airline operations are constrained

Banking Sector Starts from Strength

India’s banking system provides another buffer. According to S&P, banks are entering this phase with strong capital ratios and non-performing assets near multi-year lows.

While prolonged high oil prices could strain corporate and SME balance sheets—and eventually affect asset quality—banks’ exposure to the most vulnerable sectors such as refining and airlines remains limited.

Retail stress, if it emerges, is likely to appear first in unsecured lending and among self-employed borrowers. Some spillover into vehicle loans and affordable housing is possible, but unless employment conditions weaken sharply, systemic risks appear contained.

External Position: A Key Cushion

A crucial advantage lies in India’s external balance sheet. The country maintains a net external asset position, and although current account deficits may widen in the near term due to higher imports and softer remittances from the Middle East, the broader external profile remains supportive of sovereign credit strength.

What Happens If the Crisis Drags On?

S&P cautions that a prolonged or intensifying conflict would amplify risks. India, like other economies, cannot fully shield itself from a sustained oil shock. The duration of the disruption will determine the depth of the impact.

If hostilities ease and supply chains normalize, India could quickly regain momentum. But if tensions flare again, policymakers and corporates may need to deploy additional measures to contain the fallout.

The Bottom Line

India’s economy entered 2026 with solid growth momentum, resilient domestic demand, and manageable inflation. The surge in oil prices presents a formidable external challenge.

However, strong corporate balance sheets, a well-capitalized banking system, and a relatively healthy external position provide meaningful safeguards. While growth may cool under sustained pressure, the broader consensus among global agencies is that India retains the structural strength to weather the storm—provided the shock does not become a drawn-out crisis.

Images courtesy of Times of India