India: Growth and inflation risks from energy shock – MUFG

MUFG’s Senior Currency Analyst Michael Wan highlight that a Strait of Hormuz closure would hit India through Oil, Liquified Petroleum Gas and Natural Gas Liquids shortages, with spillovers to fertiliser, food production and inflation. The bank estimates every US$10/bbl Oil increase cuts GDP growth by 0.1–0.2pp and lifts inflation by about 0.2pp, with sustained US$100/bbl Oil likely pushing FY2026/27 growth below 6.5% and inflation above 4.5%.

Energy shortages threaten stagflation risks

"This time is different in this crisis - it is not just about higher oil prices but a potential looming energy shortage, with India and Asia disproportionately hit by a prolonged Strait of Hormuz closure: While this applies to the rest of Asia as well, the vulnerability specifically in India’s case comes from Liquified Petroleum Gas (LPG), with virtually all of India’s LPG and Natural Gas Liquids imports coming from the Middle East."

"In addition, 60% of India’s imports of natural gas comes from the Middle East, and in particular Qatar. With natural gas a notoriously difficult energy product to store and also transport, the potential for a prolonged disruption is also significant."

"Both these factors in natural gas and LPG shortages could have spillovers to other areas such as fertiliser and food production, and as such growth and inflation as well."

"Overall, we estimate that every US$10/bbl increase in oil prices cuts GDP growth in India by around 0.1-0.2pp and raises inflation by around 0.2pp in India. These historical sensitivities however likely under-estimates the macro impact, because the specific transmission mechanisms in this crisis may not just be about oil prices, but also includes potential energy shortages, meaningful negative indirect spillovers across sectors over time, coupled with non-linear effects as oil prices rise above certain thresholds."

"Our current GDP forecasts for India is 7% for FY2026/27, and if oil prices rise above our baseline assumption of US$70/bbl say to US$100/bbl on a sustained basis, growth will likely come in below 6.5% for instance."

"Again, if oil prices were to rise to US$100/bbl, average inflation in India will likely rise above 4.5% for FY2026/27."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)