India’s economic recovery could come under greater strain in the months ahead as a surge in crude oil prices threatens to fuel inflation, weaken consumption
and weigh on industrial and rural activity, according to a BNP Paribas report. The brokerage has flagged higher energy and commodity costs as a growing challenge for the domestic economy, even as some key macroeconomic indicators continue to show resilience. The report said Brent crude has crossed the $100-per-barrel mark, creating fresh inflationary risks for India. With global interest rates also remaining elevated, the Reserve Bank of India could face greater difficulty in maintaining its current monetary policy stance. The brokerage described rising oil prices and commodity inflation as a “material challenge” for India in the near term. Crude Oil Surge Puts Inflation Back In Focus Higher crude prices are particularly significant for India because of the economy’s dependence on imported oil. An increase in energy costs can feed into transportation, manufacturing and other parts of the supply chain, potentially pushing up prices for businesses and consumers. BNP Paribas noted that retail inflation accelerated to 4.8 per cent year-on-year in August, marking its highest level since January 2025. Inflation has remained above 4 per cent for three straight months. The pressure is no longer restricted to food and fuel. Core inflation has also picked up, partly reflecting an increase in metal prices. The brokerage expects the latest rise in crude prices to add further pressure to the inflation trajectory. This could also complicate the RBI’s policy choices. BNP Paribas said the central bank has less room to keep interest rates unchanged amid the renewed inflation risk and noted that higher global rates could add to pressure on domestic monetary policy. Manufacturing, Services Show Signs Of Losing Momentum While India’s broader macroeconomic picture remains supported by strong credit expansion, automobile sales, improving employment indicators and sizeable food-grain stocks, BNP Paribas pointed to a moderation in several high-frequency indicators. Manufacturing activity has weakened, with the Manufacturing PMI dropping to its lowest level since August 2021. Growth in new orders and steel production has also slowed, while industrial production growth moderated on a month-on-month basis. The services economy has seen similar signs of cooling. Airline passenger traffic, FASTag transactions and cargo volumes have weakened, indicating softer activity across some segments. The combination of higher commodity prices and slower industrial momentum could therefore create a more challenging operating environment for businesses in the coming months. Rural Economy Faces Additional Headwinds Rural activity is another area of concern highlighted in the report. BNP Paribas said weaker monsoon conditions, elevated food inflation and a reduction in crop-sowing activity have affected rural dynamics. Reservoir levels in August stood at 68 per cent of capacity, down from 83 per cent during the same period a year earlier. The decline in water availability has added pressure to sowing activity. Agriculture GVA growth also moderated, falling to 3.6 per cent year-on-year from 3.9 per cent in March 2026. A slowdown in rural activity could have wider implications for consumption, particularly for sectors that depend heavily on demand from rural and semi-urban markets. Higher food prices could further squeeze household purchasing power. Growth Outlook Faces Oil Price Test BNP Paribas said the RBI’s projection for second-quarter economic growth was 4.7 per cent, broadly matching the Bloomberg consensus. However, the brokerage warned that the renewed rise in crude prices could alter the recent improvement in inflation expectations. Higher energy and commodity costs could simultaneously affect inflation and demand, creating a difficult balance for policymakers. For businesses, elevated input costs may also put pressure on margins if the increase cannot be fully passed on to consumers. Despite the emerging risks, the economy continues to have some buffers. Strong bank credit growth remains supportive of economic activity, while continued government procurement of food grains provides additional support.
