Oil warms on conflict, but inflation may escape heat

Refiners likely to absorb potentially higher crude prices during war in West Asia

- Shayan Ghosh & Rituraj Baruah

Escalating conflict between Iran and Israel and a consequent increase in crude price are unlikely to impact India's inflation print, economists said, with state-run refiners expected to absorb higher price hike instead of passing it on to consumers.

Brent crude prices have been rising since Friday, after Israel struck Iran's nuclear facilities and killed several top officials and scientists. Iran vowed "harsh punishment" after the strikes and has retaliated.

Experts said the trajectory of oil prices depends on whether Iran closes the Strait of Hormuz, through which about a fifth of the world's oil supply passes. On 14 June, Al Jazeera reported citing Iranian news agency IRINN that Iran is considering closing the strait.

For India, which imports close to 90% of its energy requirements, the impact on inflation would depend on the benevolence of state-run oil marketing companies.

While higher crude prices would raise India's import bill, it would not lead to runaway price rise, if OMCs absorb the hike. An estimate by Emkay Global Financial Services' chief economist Madhavi Arora showed that for every $10 per barrel increase in oil leads to an annualized increase of 35 bps in retail inflation. That said, Emkay retained its inflation forecasts.

"They (retail petrol and diesel prices) have been unchanged in the last couple of years and only when these prices change, will there be an impact on the inflation print," said Gaura Sengupta, chief economist, IDFC First Bank.

"Given the fact that when crude prices were low, the retail prices were not changed, now when crude has picked up, OMCs will not change it," Sengupta said.