Why falling oil price, rupee recovery mark a breather, not breakthrough, for India

On November 11, the rupee touched 93.6 to the dollar, its strongest level since April, before settling at 93.7. Foreign investors had poured nearly $6 billion into Indian equities in the first days of the month. The same day, Moody’s Ratings raised its forecast for India’s growth in 2026-27 to 7 per cent, saying the economy had absorbed the energy shock from the Iran war better than expected.

Yet the oil market sounded a warning even as those numbers came in. After briefly slipping below $90 a barrel on November 10 for the first time since August, Brent crude rose back to about $92.5 as fresh attacks on commercial vessels in the Strait of Hormuz dented hopes of a quick peace.

That single day captures India’s position. Brent has fallen by more than a fifth from its October 30 close of $117.64, and the rupee has clawed back nearly 3.5 per cent from its record low of 96.97 in May. For an economy that imports about 9 out of every 10 barrels of crude it consumes, a fall in oil prices coinciding with a stronger currency is about as good as the external picture gets. After a prolonged period of managing external sector stress, policymakers have reason to breathe easier.

But the improvement in the headline numbers conceals a more complicated picture. The question facing New Delhi and the Reserve Bank of India (RBI) is whether this is the beginning of a sustained improvement in India’s external accounts or merely a temporary reprieve delivered by falling oil prices, changing geopolitical expectations and RBI intervention.

Both RBI and the ministry of finance are watching the developments closely. RBI governor Sanjay Malhotra had anticipated just such a turn. In early October, the RBI’s Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 5.5 per cent. At the media conference that followed, Malhotra argued that, by several estimates including the real effective exchange rate, the rupee “may be undervalued”, and that it could strengthen further as the conflict de-escalated. He also said the central bank would support an orderly movement of the currency towards its correct value without excessive volatility.

Days later, finance minister Nirmala Sitharaman said she expected the RBI to keep working to ensure the rupee does not become too volatile, adding that she would prefer the currency to find its own level. She called the rupee’s sensitivity to dollar movements the real challenge, saying “we will be attending to it”, and that fiscal discipline should not worry investors.

The finance ministry’s own Monthly Economic Review for October was more guarded. It noted that pressure on the rupee persisted amidst global uncertainties, and that the current account deficit had widened cumulatively over April-August.

The arithmetic is compelling. India’s crude import bill during April-September 2026 stood at $90.6 billion, against $61.9 billion in the corresponding period last year, an increase of about 46 per cent, according to the Petroleum Planning and Analysis Cell of the ministry of petroleum and natural gas.

Import volumes, however, barely moved, at 122.7 million tonnes against 121.8 million tonnes. Much of the additional expenditure was therefore attributable to higher prices rather than a surge in consumption. The Indian crude basket averaged $116.09 a barrel in September and $119.9 in October, its highest level since March 2012. A sustained correction in crude prices could reverse a significant part of this pressure.

The rupee adds another dimension to the calculation. Since crude is purchased in dollars, Indian refiners benefit not only when international prices fall but also when fewer rupees are required to buy each dollar. The two movements reinforce each other.

Take an illustrative case. A barrel costing $116, roughly September’s basket average, at an exchange rate near the rupee’s record low of about Rs 97, translates into a domestic cost of Rs 11,252. At $90 and Rs 93.75, the equivalent cost falls to Rs 8,437.50. That is a reduction of about 25 per cent before accounting for freight, insurance and other costs.

For the government, the implications extend well beyond the oil import bill. Lower energy costs can moderate imported inflation, ease pressure on the current account and improve the cost structure of energy-intensive industries. Aviation, chemicals, logistics and manufacturing could all benefit. Oil marketing companies, which have absorbed considerable pressure during periods of high crude prices, may also find room to repair their margins. The government could gain some fiscal breathing space, although the eventual benefit will depend on domestic fuel pricing and petroleum tax decisions.

Yet the currency’s recovery deserves closer scrutiny. The rupee’s recent appreciation has coincided with lower oil prices, a return of foreign portfolio flows and measures taken by the RBI to manage dollar demand. These are not interchangeable sources of strength. A reduction in the oil import bill improves the underlying demand-supply balance for foreign exchange. Portfolio inflows, by contrast, can reverse quickly. Foreign investors put a net Rs 45,960 crore into Indian equities in the week ended November 6, more than the Rs 45,162 crore they pulled out in all of October. Part of that money was rotating out of global artificial intelligence stocks rather than buying into India’s fundamentals. The rupee also remains down about 4 per cent in calendar 2026.

The RBI’s role is particularly important. Since October 12, it has run a special window that meets the entire daily dollar requirements of Indian Oil, Bharat Petroleum and Hindustan Petroleum, taking the country’s largest dollar buyers out of the spot market. Such measures can help manage volatility, but they do not make the underlying dollar requirement disappear. They change the channel through which that demand is met. The central bank must therefore balance immediate currency stability against the longer-term management of its reserves and forward positions.

Its outstanding net short forward position, a record $239.2 billion at the end of September against $200.06 billion a month earlier, is an important part of this story. Much of the increase stems from the concessional swap window for foreign currency non-resident (FCNR-B) deposits opened in June, which brought in dollars now but created obligations to deliver them later.

About $40 billion of these commitments falls due within a year, $56 billion in one to three years and $143 billion in three to five years. Malhotra has described the position as “very manageable”. Even so, it complicates the task of managing liquidity and currency expectations, and the cost of hedging has climbed: the 12-month forward premium rose from 3.36 per cent at the end of September to 4.57 per cent on October 30.

IDFC First Bank estimates that India ran a balance of payments surplus of $65 billion in the first half of 2026-27, but that without the RBI’s swap windows the figure would have been a deficit of $85 billion. Foreign exchange reserves, meanwhile, stood at $717.06 billion on October 30, about $68.6 billion below their September 4 peak of $785.71 billion. Lower oil prices may reduce the need for intervention going forward, but they do not automatically unwind existing commitments. The opportunity now is to use the improvement in external conditions to rebuild room for manoeuvre.

There is another cost that the falling Brent price does not capture. The conflict has driven up the cost of shipping crude even on routes that avoid the Strait of Hormuz. Drewry Maritime Research puts freight from Fujairah, the UAE port that lies outside the strait on the Gulf of Oman, to India’s west coast at $7.51 a barrel in October. That compares with $4.76 in September and $1.57 in late February, an increase of nearly 377 per cent, as more cargoes move through ship-to-ship transfers to bypass disrupted corridors.

Freight on Russian crude from the Baltic ports of Primorsk and Ust-Luga has risen from about $8-12 a barrel before the war to $25-30 or more. The increase illustrates how quickly logistics costs can erode the benefit of a lower benchmark price.

The insurance premium is an equally important variable. Marine insurers and shipowners price geopolitical risk, not merely the prevailing market price of crude. Before the war began on February 28, additional war-risk cover for a Hormuz transit cost about 0.25 per cent of a vessel’s hull value. At the peak in July, brokers were quoting 7.5-10 per cent.

A diplomatic easing between Washington and Tehran may lower expectations of an immediate disruption. US President Donald Trump said this week that further strikes on Iran would not be necessary if Tehran signs a strong deal. But an interim agreement over the summer collapsed, ships were attacked in the Strait again this week, and risk that has been repriced this sharply does not normalise overnight. Nor does a decline in crude prices establish that shipping corridors have returned to normal. For India, the relevant measure is the landed cost of crude, including freight and insurance, rather than Brent alone.

The composition of India’s oil sourcing also matters. India imported a record of about 5.6 million barrels a day of crude in October, with Russia supplying roughly 35 per cent. Diversification towards suppliers in Russia, the United States, West Africa and other regions can reduce dependence on a single route, but longer voyages and different shipping arrangements bring their own costs. The security of energy supplies cannot be judged simply by the number of countries from which India buys oil. It must also account for the reliability, cost and insurance of the routes through which those supplies travel.

The global financial environment presents another uncertainty. Hotter-than-expected US inflation data this week strengthened the dollar and raised the odds of a Federal Reserve rate hike in December. A stronger dollar, elevated US Treasury yields or a fresh bout of risk aversion could put pressure on emerging-market currencies, including the rupee. Foreign investors may return to Indian markets when valuations and growth prospects become attractive, but sustained inflows will require confidence in corporate earnings, macroeconomic stability and the policy environment. Cheaper oil can improve India’s investment proposition; it cannot substitute for these fundamentals.

Moody’s upgrade offers some comfort on that front. The agency credited India’s diversified crude and gas supplies, and the cushion that state-run oil marketing companies and tax cuts gave consumers. It also sees signs of a new private investment cycle in capital goods output, industrial credit and capacity utilisation. But its list of risks reads like the RBI’s own worries: broadening price pressures, a weak monsoon and El Nio, and the possibility that further rate increases delay the investment recovery. Moody’s still rates India Baa3 with a stable outlook, and has warned that a reversal of fiscal consolidation gains could put pressure on the rating.

That warning will matter in the coming weeks. The MPC meets on December 2-4 with inflation, not the currency, as its main concern. Retail inflation rose to 5.54 per cent in September, driven by food, and economists expect October’s reading to approach 6 per cent. The minutes of the October meeting show Malhotra flagging “increasing signs of generalisation of inflation” and saying a further increase in the policy rate “might be needed”.

Cheaper oil and a steadier rupee weaken the case for another hike but do not eliminate it, especially if pump prices stay where they are. The finance ministry, meanwhile, is finalising the revised estimates for 2026-27 and the Budget for 2027-28, due on February 1. The fiscal deficit reached 42.1 per cent of the full-year target in April-September, against 36.5 per cent a year earlier, as food and fertiliser subsidies rose.

For households, the most visible question will be whether the decline in crude translates into lower petrol and diesel prices. That outcome is not automatic. In Delhi, petrol still costs Rs 102.12 a litre and diesel Rs 95.20, unchanged despite the slide in crude. Oil marketing companies may first seek to recover earlier losses. On March 27, the finance ministry cut excise duty on petrol and diesel by Rs 10 a litre to cushion consumers, at an estimated annual cost of about Rs 1.75 lakh crore. It must now choose between restoring that revenue and passing the relief on at the pump. The first helps the fiscal arithmetic; the second would help the RBI’s fight against inflation. The distribution of the oil-price dividend will, therefore, be as much a political-economy decision as a market outcome.

India has been given a window of opportunity. Lower crude prices and a recovering rupee can ease the immediate pressure on the current account, inflation and foreign-exchange management. But the test is whether policymakers use this period to strengthen the underlying external position: rebuild reserves, reduce excessive dependence on intervention, attract durable capital flows and improve the resilience of energy supply chains.

The distinction is between relief and resilience. India has some of the former. The latter will take considerably longer to establish. The falling oil price and the rupee’s recovery offer a breather. They are not yet a breakthrough.