US midterm results have raised the odds of Iran war fading out. Even otherwise, India’s better prepared on sourcing oil than at the start of the war: Note, the current account deficit remained stable
This appeared in the Times of India on 9 November 2026 (link).
Oil markets had feared that there would be a meaningful escalation in the Iran war after the US midterm elections. Instead, we are now looking at an increased probability of an early resolution of the conflict in West Asia. After all, not only did the swing in favour of Democrats turn out to be much stronger than expected, Republicans themselves are blaming the Iran war’s unpopularity as a major factor behind the election result.
Price of Brent crude oil is back below $100 per barrel (bbl), down sharply from $117, which was seen just two weeks back. Price of the oil slated for delivery a year from now, has also declined from $90 to $80. That is only about $10 higher than the average in the last fiscal year.
Uncertainty is far from over, though, and large parts of the energy ecosystem continue to be disrupted, including the Russian energy complex. While still adequate and no longer falling sharply as supplies have recovered, even if not fully, global oil inventories are more than half a billion barrels lower than before the war, and may take more than a year to replenish after the conflict ends.
In addition, recovery in supplies of crude oil from West Asia has been at much higher freight costs. Insurance and fuel expenses have risen sharply, further exacerbated by the need to have ship-to-ship transfers (one ship navigates the high-risk waters, while a different vessel takes over after passing the Strait of Hormuz), plus disruptions in tanker scheduling and routes.
Goldman Sachs estimates that global average crude freight rates have risen above $20/bbl, from just $3/bbl a year ago. This adds to the landed cost of crude oil.
There is also the rise in refining margins, due to West Asian refinery production getting disrupted, which also adds to the effective price of energy. For example, despite shrinking from a peak of $75/bbl six weeks ago, at $50, diesel margins are still 2.5 times the pre-war level of $20. A combined effect of higher crude, higher freight, and higher refining margins has meant substantial increases in retail fuel prices globally.
For India, the terms-of-trade shock on energy (oil, gas, fertiliser, and edible oil imports) exceeds 2% of GDP. Despite this, growth indicators have been robust. And over the past two months, upgrades to India’s growth forecasts have been the strongest among major global economies.
Some of this commendable resilience is due to the fading of monetary and fiscal headwinds, which held back growth in the last two years. This year, with fiscal consolidation behind us and credit formation accelerating, economic expansion was likely to be above trend-growth anyway. But there are several other factors in play as well.
As India has surplus refining capacity, it is a net beneficiary of the rise in refining margins. As its oil-marketing companies (OMCs) are majority govt-owned and are also refiners, the diesel margin expansion is not being passed on. By calibrating windfall taxes on exports of refined products, GOI is also sequestering these gains to subsidise some of the rise in crude prices.
But the most significant intervention is fiscal, as govt cushions the economy by limiting the increase in prices of retail fuel and fertilisers. Remarkably, this may not result in any meaningful increase in govt borrowing. Higher disinvestment (like the privatisation of IDBI and the LIC stake sale) is helping, as is the growth in GST collections and corporate taxes (with the latter largely offsetting the weakness in personal income tax growth).
Govt is also likely to dip into the 1tn Economic Stabilisation Fund, which it had created last year, effectively pushing fiscal savings from the previous year to the current year. Together, these measures would suffice to limit meaningful fiscal slippage.
That leaves us with the pressure on the external account. After all, we still need to pay for the higher import bill in dollars, at a time when global capital flows are weak. Such apprehensions have been the major source of weak sentiment around the currency. But data does not show any reasons for concern yet.
We only have comprehensive balance-of-payments (demand and supply of dollars) data for the June 2026 quarter. Despite higher oil prices, current account deficit barely changed to $4.2bn, from a deficit of $3.4bn in the June 2025 quarter. Rise in goods trade deficit from $69bn to $86bn was mostly offset by a growth in the services surplus, and strong growth in remittances.
This seems to have continued in the Sept quarter, where the goods deficit rose by $2bn compared to last year, but the services surplus increased by $2.5bn. Once the growth in remittances is factored in, there is unlikely to be a meaningful increase in the current account deficit.
This is not to say that India’s import bill on energy is not rising. But it appears that growth in services exports and remittances as well as improvement in goods exports (including refined oil products like diesel), are largely offsetting the impact.
Therefore, pressure on the currency, and the need for RBI to sell dollars to stabilise the rupee, is mostly due to corporates hedging imports excessively, while not hedging exports. These are speculative positions that are likely to unwind, as markets see the rupee not depreciating.