India’s limited oil buffers, reliance on subsidies heighten risks from Middle East conflict, Moody’s warns

India’s heavy reliance on oil imports from the Gulf, coupled with relatively limited strategic reserves, leaves it vulnerable to rising energy prices and potential supply disruptions amid escalating Middle East tensions, Moody’s raised caution on Monday.

The agency flagged that while some Asia-Pacific economies are cushioned by sizeable strategic reserves, India depends more on administrative measures to shield consumers, making it vulnerable to sustained spikes in global energy prices.

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Oil dependence a key vulnerability

India’s reliance on oil and gas imports from Gulf economies leaves it particularly sensitive to disruptions in the region. In a severe scenario simulated by Moody’s, Brent crude prices could rise as much as 64% above baseline levels if the conflict intensifies and persists.

Such a surge would result in significant economic damage, with GDP losses across Asia-Pacific peaking at around 3%. India and China are expected to face sizeable headwinds due to their dependence on imported energy, which could weaken trade balances, pressure currencies and push up inflation.

Domestic demand weak, inflation benign for now

While exports across the region have remained resilient, domestic demand continues to lag, including in India, where consumption is below pre-pandemic trends.

This has kept inflation relatively subdued. Consumer price inflation in India, which typically ranges between 4% and 6%, is currently running lower, in line with broader regional trends where price pressures have remained muted or even tilted towards deflation in some economies.

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However, Moody’s cautioned that the benign inflation environment could reverse if commodity prices continue to rise amid geopolitical tensions.

Policy reliance vs limited buffers

Unlike Northeast Asian economies such as Japan and South Korea, which maintain sizeable strategic reserves to absorb short-term shocks, India has more limited buffers and leans on fuel subsidies, tax cuts and price caps to manage volatility.

While these measures can cushion the immediate impact on consumers, they come with fiscal costs and may constrain broader policy support if global conditions deteriorate.

Moody’s said that although India is somewhat less import-dependent than some advanced Asian economies, its reliance on policy interventions rather than reserves underscores its vulnerability to prolonged external shocks.