Former IMF Deputy Managing Director and Harvard professor Gita Gopinath has warned that India could face sharper fuel price hikes, higher inflation and slower growth if the ongoing West Asia conflict stretches deeper into June, with crude oil prices potentially surging to $140 a barrel.
Speaking to India Today TV, Gopinath said the conflict had turned into a “global supply shock” impacting oil, LPG, LNG and fertilisers, with shortages now becoming as serious as rising prices.
“We are certainly seeing that in India, which relies a lot on the Middle East for its fuel,” she said. “It’s not just about the prices, but it’s about the shortages.”
Her warning comes as tensions around the Strait of Hormuz continue to disrupt global energy supplies, pushing governments worldwide to rely heavily on reserves.
Gopinath said the current situation could worsen significantly if supply disruptions continue through June.
“The estimates are that it’s going to take a lot more destruction in demand if prices have to stay at the $110 a barrel that we have right now,” she said.
“It’s very likely that we’re looking, especially in June, at closer to $140 a barrel of oil.”
She said many governments were hoping the US administration would eventually help reopen the Strait of Hormuz, but warned that even if an agreement was reached immediately, restoring normal supply flows could take “two to three months”.
Asked whether India should prepare for more domestic fuel price hikes, Gopinath said the government had little choice because the crisis was an “external shock” beyond India’s control.
“Yes, having fuel prices go up at the pump will deliver the behavioural change that you need,” she said.
“The pain will have to be shared by the government having a slightly higher fiscal deficit, while at the same time some part of the price increase is passed through to households and companies.”
She also warned that inflation pressures were already building and would likely intensify in the coming months.
“We are entering a phase where inflation will keep creeping up,” she said.
Gopinath also weighed in on the sharp fall in the rupee, which has weakened from around 91 against the US dollar in February to nearly 97.
She argued that policymakers should not obsess over whether the rupee breaches the psychological 100-mark.
“The relevant number is not the actual value of the exchange rate,” she said. “What matters is jobs, inflation and output.”
According to Gopinath, a weaker rupee can actually help India reduce imports faster during an external shock by making foreign goods more expensive.
“When the currency depreciates, it helps you with the adjustment that you need, which is you cut back on imports,” she said.
She cautioned against aggressive intervention in currency markets, arguing that India’s forex reserves, though strong at around $700 billion, were still finite.
“If you try to intervene, all that happens is you lose your reserves,” she said.
While backing the government’s call for “adjustment” and “voluntary restraint”, Gopinath said the burden of the crisis could not fall entirely on ordinary households.
She suggested targeted cash transfers for vulnerable families and liquidity support for small businesses hit by rising fuel and input costs.
“You will require more cash transfers to vulnerable households,” she said. “You could even cover some fraction of middle-income households.”
She also backed government-guaranteed loans for viable small businesses struggling because of the ongoing crisis.
Despite the mounting challenges, Gopinath rejected suggestions that India was entering a full-scale economic crisis.
“I do not agree with that,” she said when asked about fears of a severe economic downturn.
She argued that India entered the current crisis with relatively strong domestic demand, public infrastructure spending and large forex reserves.
“The Indian economy has many areas of strength,” she said.
At the same time, she admitted India still faced long-standing concerns around foreign investment, regulatory uncertainty and ease of doing business.
“There are still Supreme Court rulings, regulatory rulings, that seem to bring up uncertainty about the rules of the game in India,” she said.
Gopinath said comparisons with the Covid years may not be entirely misplaced if the conflict drags on and oil prices remain extremely elevated for months.
“If this conflict continues and we’re looking at oil at $140 a barrel and expected to stay there, it’s a problem not just for India. Frankly, it’s a problem for the world,” she said.
Still, she insisted the situation was not yet one for panic.
“This is definitely not a moment to panic,” Gopinath said. “This is a moment where, as the Prime Minister says, it requires adjustment.”