Crude below $75: What Brent’s sharp drop means for India’s FY27 Inflation and GDP runway

For the last 3 months, since the West Asia crisis began, the country has closely followed every dollar increase in crude prices. While Crude jumped almost 40% between February 28 to May 31, hitting $120 levels, it has corrected to $71-72 levels by mid-June amid the resumption of shipment through the Strait of Hormuz. 

This is important because the RBI, in its latest inflation trajectory for FY27, assumed the baseline for crude prices around $95 per barrel. It therefore goes without saying that a reading below that can mean significant room for surprises on the upside for the Indian economy. 

Why Brent Crude below $75 matters for India

Near-term challenges persist: Analysing 8.4% input cost factor

Most economists have built a baseline assumption that supply disruption and oil price volatility may ease significantly in the second half of 2026, but one can’t completely wish away near-term challenges. 

According to Dipti Deshpande, Principal Economist, Crisil, “The slippage in crude below $75 certainly offers a respite to the Indian economy. A crude price shock – as per our analysis – poses a broader economy-wide risk than natural gas, given the larger proportion of crude and petroleum products in input costs for domestic production at 8.4% vs 1.0% for gas.”

India’s import bill had ballooned to $35.5 billion in April-May from $20.9 billion a year after the international crude oil prices (Indian basket) averaged around $110/barrel during April-May. 

India’s import bill in April-May

As per the RBI latest minutes, “indications are that average oil prices for 2026-27 would be substantially higher than what were assumed during the last policy statement. Higher energy prices and an increase in several input prices also led to a sharp spike in WPI inflation in April 2026.” 

As a result, Crisil’s Deshpande pointed out that it is important for prices to sustain at these levels. “However, prices sustaining at these low levels will be critical. Currently, this seems less likely. It has been 4 months since the conflict began and the trajectory has been anything but linear. As the US and Iran move closer to forging a potential agreement, hopes of relief are surfacing among those most affected. The shift in sentiment is reflected in oil markets,” she added. 

How soon can supply lines normalise?

One of the key reasons that most economists and industry observers continue to be skeptical about the near-term is because of the time that might be used up in the potential restoration of supplies to pre-war levels. 

“The risk of negotiation setbacks and periodic disturbances remains high, keeping war-risk premiums above pre-conflict levels. Additionally, structural impediments to restore crude and natural gas supplies and the potential rebuilding of inventories would keep crude prices above pre-conflict levels,” Crisil’s Dipti Deshpande explained. 

Macro focus: Re-evaluation GDP, inflation and current account deficit

However, if prices continue their journey south, it would definitely be good news for India’s current account deficit numbers. Apart from a lower print there, economists also believe that it would help the recent spike in inflation and support growth. 

Gaura Sengupta, Chief Economist at IDFC First Bank reiterated the need for prices to continue at the current low levels. She explained that “if the current pace of crude oil price decline sustains, it could result in a lower current account deficit, lower inflation and higher GDP growth. Even fiscal slippage risk could be reduced with a lower subsidy bill in the remainder of FY27. We maintain our expectation of the RBI remaining on pause in FY27.”

Garima Kapoor, Deputy Head of Research & Economist at Elara Capital, added that “Oil’s price correction significantly eases India’s macroeconomic concerns going ahead, especially on funding of the current account deficit and inflation. However, it is important to note that the impact of the spike of the last 3.5 months during the US-Iran war will continue to be felt via gradual increase in inflationary pressures as the passthrough of past increases plays out.”

For FY26, the current account deficit had increased marginally as compared to the previous year. Net capital inflows fell short of financing the current account deficit as net FDI inflows were offset by higher FPI outflows. This led to a depletion of $23.6 billion of foreign exchange reserves (on a balance of payment basis) in FY26. All eyes are now on how the number eventually pans out at the end of FY27

Crisil expects to see a sustained high energy price shock through this fiscal and does not rule out a ripple impact “through the economy this fiscal deeming a less favourable growth-inflation mix. Higher energy and input costs are expected to weigh on India’s growth this fiscal. As essential inputs into industry, agriculture and services, a higher price for oil and gas has pushed up the cost pressure for producers,” Deshpande added. 

Industry to pass on higher raw material cost to customers

Earlier RBI had highlighted that elevated energy and other commodity prices coupled with continued supply disruptions are likely to affect economic activity. While import diversification in affected commodities has helped in improving supply, it comes at a higher cost. 

According to Crisil, the key ratings agency, in some sectors, “these pressures could be passed on to retail prices, while others could face crimping of producer margins. Both these are expected to slow GDP growth this fiscal.”

Deshpande highlighted that  “core input sectors such as land transport, mining, chemicals, rubber and plastic products are most exposed to a direct and immediate impact of an energy shock. Manufacturing, mining and construction – critically dependent on these core input sectors – have 40% of their costs linked to energy and linked inputs, are therefore among the most vulnerable output sectors.”

The bottom line

Looking ahead, most experts believe that the full impact will depend on how soon the supply through the Strait of Hormuz resumes pre-war levels. According to them, this normalisation of supply chains and the burden-sharing approach among the stakeholders coupled with crude below the RBI’s baseline assumption of $95 can help address economic concerns for India. But the bottomline is prices need to continue at these levels for an extended period.