High oil prices may hit India’s growth, but strong fundamentals offer a cushion: S&P

India’s strong domestic fundamentals, potential government support, and significantly improved corporate and banking health would soften the blow of rising crude oil prices caused by West Asian conflict, according to S&P Global Ratings. However, persistently high energy costs could still drag down overall economic growth, the rating agency noted.

In its scenario analysis on India, if oil prices average $130 a barrel in 2026, the country’s growth could slow by up to 80 basis points in FY27.

S&P Global Ratings said that if oil prices remained elevated, corporate profitability would also come under pressure, with earnings before interest, tax, depreciation and amortization (Ebitda) expected to fall by 15-25% in FY27, while leverage could rise by 50-100%. It cautioned that asset quality in the banking system would also likely worsen in such a scenario, with weak loans rising to 3.5%.

Despite downside risks, S&P Global Ratings said it expects no immediate impact on sovereign, corporate, or banking ratings. However, the government's efforts at fiscal consolidation could face temporary setbacks due to the severity of the situation, the rating agency said.

“Our base case assumes the war's intensity will peak and the Strait of Hormuz's effective closure will ease during April, but some disruptions are likely to persist for months. Should hostilities wind down, the expected impact in fiscal year 2027 should be closer to our base case,” the agency said.

“We don't expect the added fiscal strain from the energy shock to affect our sovereign credit rating on India (BBB/Stable/A-2),” S&P Global Ratings said, adding that its fiscal performance and debt burden scores for India are already at the lowest level on its scale, reflecting India's already stretched fiscal profile.

On the health of the banking sector, the rating agency said banks are well-positioned to navigate elevated oil prices and a weakening rupee as more than 40% of Indian corporate debt maps to investment grade, which significantly reduces default risk. Asset quality is also likely to remain healthy, with credit losses potentially inching up to 0.9% over the next 12-24 months, S&P Global Ratings said.

“We are watching for signs of how fast India can regain momentum in a scenario in which a ceasefire between Iran and its adversaries lasts. However, if hostilities erupt again, our focus will be on the measures that companies and the government take to prevent a crisis. A longer conflict would mean greater stress for India, as with most regions,” the agency said.