Will inflation breach 6% again? Oil shock puts India at a crossroads

India may be heading toward a fresh inflation scare, with global crude oil prices emerging as the single biggest trigger that could push retail inflation beyond the Reserve Bank of India’s (RBI) tolerance limit of 6%.

A recent assessment by HSBC warns that if crude oil prices sustain above $100 per barrel, headline inflation in India could cross the 6% mark, potentially forcing the RBI to reverse its current stance and consider interest rate hikes.

According to HSBC economists, India is currently at a “crossroads”. The trajectory of inflation now hinges largely on whether crude prices cool below $100 or remain elevated. If prices stay above this level for a prolonged period, inflation is likely to breach the RBI’s upper tolerance band. In contrast, if crude averages closer to $80 per barrel, inflation could remain contained around 4.5-5%, allowing policymakers to avoid tightening monetary policy.

Why crude matters so much

India’s vulnerability stems from its heavy dependence on imported oil. Nearly 85% of its petroleum requirement is sourced from abroad, making domestic prices highly sensitive to global energy shocks.

Higher crude prices ripple across the economy- raising fuel costs, increasing transportation expenses, and eventually pushing up prices of food and essential commodities. This creates a broad-based inflationary effect rather than a sector-specific one.

Estimates suggest that every $10 increase in crude prices can raise India’s inflation by nearly 55-60 basis points, underlining the scale of the risk.

The ongoing geopolitical tensions in West Asia have already driven crude prices upward, with Brent averaging above $100 in recent weeks.

Economists warn that prolonged disruptions in energy supply could trigger “second-round effects” - including higher freight costs, supply shortages, and weaker economic activity - all of which can further fuel inflation. At the same time, a weakening rupee due to rising oil import bills could amplify imported inflation, adding another layer of risk.

What will RBI do?

If inflation does breach 6%, the RBI may have little choice but to respond with tighter monetary policy. HSBC indicates that sustained high crude prices could lead to rate hikes of at least 25 basis points in the fiscal year. However, such a move comes with trade-offs. Higher interest rates could slow economic growth, especially at a time when global uncertainties are already weighing on demand. This sets up a classic policy dilemma: control inflation through tighter rates or support growth by maintaining easier financial conditions.

For now, inflation in India remains within the RBI’s comfort zone. But the situation is fluid. If crude oil continues to hover above $100, the risk of inflation breaching 6% is real, and with it, the possibility of rate hikes and slower growth.