A chokepoint is a geographic fact that becomes an economic one only through the balance of payments. The Strait of Hormuz carries a fifth of the world’s oil and gas. India imports more than 88 per cent of the crude it uses, about half of that through Hormuz, and roughly 60 per cent of its LPG. When the strait is contested, nothing about India’s demand for fuel changes — which is precisely why everything about its price does.
Start with the arithmetic that makes the transmission so direct. The RBI’s own working estimate is that every $10 a barrel rise in crude adds roughly 49 basis points to inflation and $13–14 billion to the annual import bill. India’s crude basket averaged $82.04 a barrel in July. By 9 September it had passed $100, and the dated physical benchmark had been above $100 since 3 September. The lag between the spot price and the import bill is short — a few weeks at most, because cargoes are priced close to delivery.
The clearest evidence that this is a price shock and not a demand one is in the volumes. Between April and July, India’s crude import bill rose 56.5 per cent to $63.4 billion. The tonnage imported over the same period was 81.9 million tonnes against 81.5 million a year earlier — a change of half a per cent. Nothing about how much oil India uses had altered. Only what it costs.
A current-account deficit is not in itself a crisis. It becomes one when the inflows that finance it reverse at the same time. In the June quarter they partly did: foreign portfolio investment moved from an inflow of $1.6 billion to an outflow of $9.6 billion. Foreign direct investment and remittances both rose, which is what kept the deterioration contained, but the overall balance of payments still swung from a $4.5 billion surplus to an $8.1 billion deficit. Reserves fell by the same amount on a balance-of-payments basis; a further $14.4 billion went out through valuation effects alone as gold prices fell and the dollar strengthened against the rupee.
What makes this episode different from 2013, when a similar oil shock forced a much sharper adjustment, is the buffer. Reserves are far larger, inflation is lower, the deficit is narrower, and the government is consolidating rather than expanding. The RBI has also acted early with swap lines, tax exemptions for foreign investors in government securities, and hedging-cost support for foreign-currency deposits — instruments it did not have ready in 2013. The chief economic adviser has called it a stress test rather than a break, and the data supports that reading so far.
The exposure that remains is not in the oil bill, which is a known quantity, but in the two things that could move together. One is remittances, about 38 per cent of which come from the Gulf — the same region whose shipping is disrupted. The other is the monsoon, which is ending about 15 per cent short. A weak harvest raises food prices at home at the same moment a weak currency raises import prices, and food and fuel together are what the inflation target responds to. That combination, rather than the oil price alone, is what to watch over the next two quarters.
