Crude Oil Shock And CPI Inflation In India

The US–Israel military operation against Iran in February 2026, which severely disrupted oil traffic through the Strait of Hormuz, drove the Indian Basket crude oil price from US$69 to US$117 per barrel within weeks, a shock of 69 percent. This paper estimates the headline CPI inflation impact of this shock under a range of sustained year-average crude price trajectories and government pass-through stances on petrol and diesel. We extend the Tomar (2019) two-channel decomposition by computing fuel-specific Leontief shares from the 131-sector Chadha et al. (2020) Input–Output table, applying the framework separately to LPG, petrol, and diesel. Across four sustained year-average crude scenarios for 2026–27 (US$100, US$117, US$120, and US$125 per barrel), we find that the LPG revision alone with petrol and diesel frozen adds only 19–23 basis points to year 2026–27 CPI. Partial pass-through of 20–50 percent on petrol and diesel keeps headline CPI within the RBI’s 6 percent upper tolerance band at all four crude levels, but at full passthrough, every scenario at US$117 and above breaches the ceiling, with year 2026– 27 CPI rising to 7.21–7.92 percent. A stress-test scenario at US$150 sustained, in which even 50 percent pass-through breaches the ceiling, is presented in the appendix.