Crude at $120 poses multi-channel risk, but demand still resilient: Aurodeep Nandi

With Brent crude moving toward the $120 per barrel mark and the rupee showing early signs of pressure, concerns are rising over the broader macro impact on India’s economy. In a conversation with ET Now, Aurodeep Nandi from Nomura noted that while the situation appears similar to past oil shocks, the transmission into the economy is currently being delayed due to policy intervention, especially through controlled fuel prices.

Nandi pointed out that petrol and diesel prices at the retail level have largely remained unchanged, which is acting as a buffer against the immediate inflationary impact of higher crude. According to him, the government’s decision to reduce fuel taxes earlier and the absorption of under-recoveries by oil marketing companies has created a “dam” that is preventing the full impact of oil prices from flowing into the economy. He added that typically, inflationary pressures become more visible only when fuel prices are adjusted, which then begins to affect growth more meaningfully.

Explaining the broader transmission mechanism, Nandi identified five key channels through which higher crude prices impact the economy. These include pressure on the external sector due to higher import costs and weak export demand, supply-side disruptions affecting industrial and services activity, rising input costs that compress corporate margins, weakening sentiment that impacts consumption and investment decisions, and finally, an eventual erosion in domestic demand. However, he emphasized that for now, underlying domestic demand remains relatively resilient, even as supply-side pressures begin to emerge.

On the external balance, Nandi highlighted that every 10% rise in crude oil prices typically worsens India’s current account deficit by around 0.4% of GDP. With the FY27 current account deficit forecast at around 2% of GDP, he noted that historically concerns rise when the deficit approaches 3% or higher. However, he stressed that the bigger vulnerability today lies not just in the current account, but in the capital account, as foreign direct investment inflows have moderated and foreign portfolio investment outflows have been persistent. This makes the overall balance of payments position more fragile even at relatively moderate current account levels.

Interestingly, despite the geopolitical shock, recent economic data has been mixed rather than uniformly weak. While core infrastructure output and merchandise exports have shown signs of slowdown, industrial production has surprised on the upside. Nandi explained that this reflects a nonlinear adjustment process, where firms are currently absorbing higher costs, drawing down inventories, and adjusting supply chains rather than immediately passing on the burden. He warned that if the shock persists, the impact will likely become more visible with a lag as margins get squeezed first and price increases follow later.

On growth, he expects moderation in the first half of FY27 with growth in the range of 6.3% to 6.7%, followed by a recovery in the second half to around 7.1% to 7.2%. Overall, he sees full-year growth at around 6.8%, which remains above consensus estimates. He also noted that India is entering this period from a relatively strong “Goldilocks” position, with stable inflation and recovering growth, which provides some cushion against external shocks.

On monetary policy, Nandi indicated that the Reserve Bank of India is currently in a neutral stance, balancing both growth risks and inflation risks. He suggested that the central bank is closely monitoring incoming data but is unlikely to take aggressive action unless the situation deteriorates significantly. Given the current conditions, he expects policy rates to remain on hold in the near term.

Finally, he emphasized that the key trigger for a sharper macro impact would be a sustained rise in crude oil prices leading to a forced adjustment in retail fuel prices. While the economy is currently insulated due to unchanged pump prices, any pass-through would likely add 20–40 basis points to inflation, reduce purchasing power, and gradually weaken consumption. He cautioned that the impact of such shocks is often nonlinear, with initial absorption followed by delayed but sharper transmission into inflation, corporate margins, and demand conditions if elevated crude persists.