West Asia conflict could lift India's inflation, hit GDP growth: Economists

Core Viewpoint - The escalating conflict in West Asia is likely to keep global crude oil prices elevated, potentially adding 10-20 basis points to India's FY27 inflation if domestic fuel retailers only partially pass on costs to consumers [10]. Inflation Impact - Brent crude has surged to approximately $85 per barrel from $73 following US-Israel strikes on Iran, with projections estimating FY27 inflation at 4.3% if crude averages $65 per barrel, but could rise by around 20 bps if prices increase to $75 [10][12]. - If crude prices remain above $80 per barrel for an extended period, indirect effects could raise FY27 inflation by about 10 bps from the initial 4.3% projection [3][10]. - A prolonged issue could lead to an impact of around 50 bps on inflation, assuming no change in excise duty [3]. Consumer Price Index (CPI) Sensitivity - The sensitivity of the Consumer Price Index (CPI) to fuel prices has increased, with the weightage of petrol and diesel in the new CPI series more than doubling to 4.8% from 2.3% [4][10]. Economic Growth and Current Account Deficit (CAD) - Higher crude prices could negatively impact economic growth, with a 10% rise in crude prices estimated to reduce real GDP growth by 15 bps [10][12]. - If crude prices stay above $80 per barrel for several months, FY27 CAD could widen to 1.3-1.8% of GDP [10][12]. - Nomura expects India's CAD to remain relatively stable at around 0.9% of GDP in FY26 and 0.8% in FY27, assuming global oil prices average around $65 per barrel [12].