India has enough oil stocks to ensure normal supplies if war breaks out in Iraq but a sustained rally in crude prices will stoke inflation, widen the trade deficit and put pressure on the rupee, analysts say.

Indian refiners have raised oil products inventories to meet demand for 35-40 days and have enough crude to keep refineries running for a month if there is disruption in supplies from the Middle East, which accounts for two-thirds of Indian imports.

"We're ready to face any difficulty if there is an interruption in supplies. We are keeping our tanks full," said Oil Minister Ram Naik.

India imports 70 per cent of its crude oil needs or 1.7 million barrels a day. Every $1 rise in crude prices inflates the import bill by $1.7 million a day or $620 million a year.

Its oil import bill of $8.73 billion in April-September was double its trade deficit, prompting economists to say India has only an energy deficit, not a trade deficit.

Economists say the inflation rate climbs half a percentage point with a $1 per barrel crude price hike.

Benchmark US crude soared to over $35 this month from an average of $26 in November, a jump of about 30 per cent.

"Since November, the price of the basket of crudes imported by India has gone up by about $8 a barrel, which means an additional import expenditure of more than $400 million a month," an oil industry official told Reuters.

Oil ministry officials said they expected only a short war and that India buys only a small amount of crude from Iraq. But they said India was in touch with Libya, Brazil and Angola to purchase crude if there was a prolonged disruption of supplies.

Officials said India was better prepared than it was during the Gulf war in 1991 as the country was then a big importer of diesel, which accounts for 40 per cent of the local oil demand. Now, India exports oil products and has more storage capacity.

A decade of economic reforms has also seen an improvement in India's external sector. India has enough foreign exchange reserves to fund imports for 14 months in contrast with during the Gulf war when it had enough dollars for 18 days of imports.

Risks to economy

But despite the relative security of supplies, soaring crude prices could still hit the economy, analysts said.

Year-on-year inflation measured by the closely tracked wholesale price index rose to 3.72 per cent in the week ended January 11 from 3.66 per cent in the previous week and 3.02 per cent at the end of October and analysts expect more rises.

"I expect inflation to cross four per cent in the next few weeks due to the lower base last year and higher oil prices," said Sanjeet Singh, analyst with ICICI Securities.

That would be below the seven per cent inflation was running at in 2000-01 but still a worry.

"The inflation outlook is uncertain, with international oil prices volatile with perceptions of a war risk, and with domestic oilseeds and edible oil prices rising," Bimal Jalan, Governor of the Reserve Bank of India, said last month.

Government bond traders fear domestic inflation could push up interest rates and put pressure on the local currency.

Currency traders say a short war would not hit the rupee as India is sitting on comfortable forex reserves of $72.4 billion.