Brent crude breached the $118 per-barrel mark on Thursday after the Organisation of Petroleum Exporting Countries (OPEC) unexpectedly left production quotas unchanged at a meeting that ended in deadlock.
The markets are already reeling under the pressure of weakening global growth, high commodity prices, high inflation, interest rates and fears of governments not achieving their fiscal deficit target.
The benchmark Sensex of the Bombay Stock Exchange closed almost flat at 18,384, witnessing a fall of 9 points. Most Asian markets also ended in the red.
India, the fourth-largest importer of oil, will see an impact of higher crude prices in its import bill, interest rates and corporate profitability.
"The biggest risk for the market is oil and side-effects of oil are inflation and interest rates. The markets are likely to be range-bound over the next six months," said Pankaj Pandey, research head, ICICI Securities.
A higher oil price also directly impacts fiscal deficit.
"Every $1 per barrel increase in crude price results into an increase in deficit by $700 million for the country," said a senior official with a leading financial institution.
According to experts, high oil prices will ultimately lead to a hike in diesel prices, which will have a direct effect on inflation.
"High inflation due to expected rise in diesel prices will force the RBI to hike interest rates to a higher degree, which will dent corporate and economic growth," said Alex Mathews, head of research, Geojit BNP Paribas Financial Services.