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The government today said it is closely monitoring the situation in Iraq and will calibrate policy response to cope with it.
"The turmoil in Iraq has the potential to have an impact on international prices of oil... The government closely monitors the emerging situation and calibrates appropriate policy responses to cope with it," Finance Minister Arun Jaitley said in a written reply in the Lok Sabha.
"If oil prices rise significantly and remain persistent at higher levels, India's import bill of petroleum, oil and lubricants and the current account deficit may be impacted," Jaitley said.
Brent crude rose towards $115 a barrel last week on concerns of Iraq's serious strife with Sunni militants, backed by al Qaida, capturing some cities.
India imports nearly two-thirds of its oil needs, leaving its currency especially vulnerable to price swings. Iraq is the second largest supplier of crude to India after Saudi Arabia.
"... Business sentiments can be affected by such uncertainties," he said, adding higher global oil prices can also have implications for domestic inflation and fiscal deficit if there is a pass-through to the domestic economy.
Jaitley further said that the hardening of international oil prices and "market expectations on the same could be the main reason that led to the depreciation of the rupee in the immediate aftermath of the Iraq crisis".
Since the escalation of the Iraq crisis in the second week of June 2014, the rupee has depreciated from Rs 59.33 to Rs 60.45 against the US dollar today.
"India's exchange rate policy is guided by the broad principles of careful monitoring and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine the exchange rate movements over a period in an orderly manner," the Minister said.
