India's Economic Resilience Amid Potential Oil Price Surge

Impact of Oil Prices on India's Economy

According to S&P Global Ratings, India's strong macroeconomic and financial fundamentals are expected to mitigate the effects of a prolonged oil price increase. However, if crude oil prices reach an average of $130 per barrel by 2026, economic growth could decelerate by as much as 80 basis points. In a stress scenario, corporate earnings before interest, tax, depreciation, and amortization (EBITDA) might drop by 15-25% in FY27, with leverage increasing by 0.5x-1x. Additionally, the quality of banking sector assets could deteriorate, leading to bad loans rising to approximately 3.5%.

S&P Global Ratings noted that India is not insulated from the repercussions of the ongoing conflict in West Asia. The adverse effects of rising energy prices and supply chain disruptions could linger for several months, affecting economic activities across households, businesses, and financial institutions.

Despite these challenges, the report highlights that robust corporate balance sheets, well-capitalized banks, and a strong external position serve as buffers against potential impacts. S&P anticipates Brent crude prices at $130 per barrel in 2026 and $100 in 2027 under stress conditions, compared to a base case of $85 and $70, respectively. The agency does not foresee any immediate repercussions on India's sovereign rating, although efforts for fiscal consolidation may encounter temporary hurdles.

Higher oil prices could exacerbate the current account deficit, with projections indicating that a $10 per barrel increase might widen the deficit by about 0.4 percentage points of GDP. The Indian rupee may also experience depreciation pressures due to risk-averse sentiment and a rising import bill.

The agency cautioned that an energy crisis could lead to increased input costs, reduced corporate margins, rising consumer prices, and heightened fiscal pressure if the government opts for subsidies. Growth may also be affected by potential supply disruptions in fuel and petrochemicals.

Nevertheless, India's economy commenced 2026 with strong growth momentum, resilient domestic demand, and low inflation, which should help absorb short-term shocks. S&P emphasized that strong domestic fundamentals, possible government support, and significant improvements in corporate and banking sector health over recent years would lessen the impact of any shocks.

While sectors such as chemicals, refining, and aviation are particularly vulnerable, infrastructure and utilities are expected to remain relatively stable. The corporate deleveraging observed in recent years, along with improved banking sector health, is also anticipated to limit systemic stress.

Indian banks are well-equipped to handle shocks, backed by strong capital reserves and low non-performing assets, although credit costs may see a slight increase, and profitability could face pressure in FY27. Overall, S&P Global Ratings believes India can withstand several months of high oil prices and supply disruptions, although a prolonged crisis could pose broader risks to growth, fiscal stability, and external balances.

India's strong external position provides a buffer against the challenges posed by a higher import bill. Therefore, the agency does not expect any immediate impact on the ratings of the sovereign, corporations, and banks. However, the government's fiscal consolidation efforts may face temporary setbacks.

S&P's base case assumes that the intensity of the conflict will peak, and the effective closure of the Strait of Hormuz will ease by April, although some disruptions are likely to persist for months. If hostilities decrease, the anticipated impact in fiscal 2027 (ending March 31, 2027) should align more closely with its base case.