India Must Closely Monitor Oil Risks: RBI Bulletin

Given India’s external dependence on crude oil, the evolving situation in the Middle East requires close monitoring and proactive measures to limit adverse spillovers, the “State of the Economy” article in the RBI’s March Bulletin said, noting that the conflict has already disrupted key energy routes, pushed global commodity prices higher and increased volatility across financial markets even as India’s macroeconomic fundamentals and external buffers remain strong.

The article also highlights that the disruption has been broad-based. Along with fuel markets, critical industrial inputs such as aluminium and urea came under pressure as supply chains were affected and inventories were already tight. The surge in commodity prices has increased upside risks to global inflation, while transport disruptions to key shipping routes have added to supply-side pressures across several economies, it said.

The conflict has entered its fourth week, centred on escalating hostilities between Iran and the US–Israel alliance, with direct strikes on energy infrastructure and rising risks to shipping through the Strait of Hormuz, a critical artery for global oil and gas flows. The confrontation has seen retaliatory attacks across the region and threats to disrupt maritime traffic, pushing crude prices above $110 per barrel and sharply increasing freight and insurance costs.  

In this environment of uncertainty, most major central banks maintained a status quo on interest rates during February and March, reflecting persistent inflation risks and geopolitical uncertainties, the article said.

However, after the release of the statement, US president Donald Trump declared that Washington will not attack any energy infrastructure of Iran for five days. This followed what he said was “productive” talks with Tehran. This led easing in prices of Brent crude oil to below $100 a barrel. Statements emerging from Iran, however, have failed to confirm the talks.

The RBI article emphasises that the situation needs to be watched carefully because of the country’s dependence on imported crude oil. It underlines that the capacity of the Indian economy to absorb external shocks though has strengthened over time, supported by strong growth, sound macroeconomic fundamentals and robust external sector buffers.

Foreign exchange reserves remain adequate to provide a cushion against external shocks, the article notes, while India’s external sector has become more resilient in recent years. The commentary also points out that the country has progressively diversified its crude oil import sources and expanded its domestic refining capacity, which provides some protection against supply disruptions in specific regions.

The article further highlights that several policy measures have already been implemented to blunt the immediate impact of disruptions in global fuel supply chains. These include steps to ensure the supply of natural gas to critical industries, measures to prevent hoarding of petroleum products and efforts to make more effective use of domestic refining capacity to meet shortfalls. Diplomatic initiatives to secure the safe passage of fuel shipments through key shipping routes have also been undertaken.

The article suggests that strengthening policy buffers will remain important if global conditions remain volatile. It also notes that the creation of an Economic Stabilisation Fund could provide additional fiscal headroom and help policymakers respond more effectively to global headwinds if the situation worsens.