India may eventually have to increase petrol and diesel prices if tensions in the Middle East continue for a prolonged period, Reserve Bank of India Governor Sanjay Malhotra has indicated, as rising crude oil prices continue to put pressure on inflation, fuel imports and the broader economy.
The said the government may not be able to keep retail fuel prices unchanged indefinitely if the current global energy shock worsens further.
“If this is to continue for longer period of time, it is just a matter of time before the government will pass on some of the price increases,” Malhotra said at a conference hosted by the Swiss National Bank and the International Monetary Fund in Switzerland.
India, the world’s third-largest oil consumer, has been facing increasing pressure after tensions around the Strait of Hormuz disrupted energy supplies and pushed prices sharply higher.
The closure of the key shipping route has raised concerns around supply-chain disruptions, inflation and India’s growing energy import bill.
Higher crude oil prices are a major concern for India because the country imports most of its oil requirements. Rising oil prices increase transportation and manufacturing costs, put pressure on the rupee and affect inflation.
At present, the government and state-run oil companies are absorbing a large share of the increase in crude oil prices.
Excise duties on fuel have already been reduced, while oil marketing companies continue to sell and below market-linked prices despite rising losses.
However, prices of several fuel products have already increased.
State-run fuel retailers have raised prices of:
Commercial LPG cylinder prices for 19-kg cylinders were recently increased by Rs 993.
Retail petrol, diesel and domestic LPG prices, however, remain unchanged for now.
The developments come days after Prime Minister Narendra Modi urged citizens to voluntarily reduce petrol and diesel consumption and
Oil Minister Hardeep Singh Puri also recently acknowledged concerns over how long oil companies would be able to continue absorbing losses while keeping fuel prices unchanged.
“How long will the oil companies be able to take it? Frankly, that worries me,” Puri said at an industry conference.
The International Monetary Fund has also backed passing on higher crude oil prices to consumers while saying India still has room to manage the current energy shock.
India’s fuel market remains largely controlled by state-owned refiners, which account for nearly 90% of retail fuel outlets across the country. Petrol and diesel prices are effectively approved by the central government, although state taxes vary.
India’s retail inflation rose to 3.48% in April from 3.40% in March, though it remained below expectations because the government absorbed part of the rise in crude oil prices.
However, economists remain concerned that prolonged high oil prices could:
The RBI has projected economic growth of 6.9% for the current financial year and average inflation of 4.6%.
The central bank kept the repo rate unchanged at 5.25% in April. Malhotra said the RBI is taking a more data-dependent approach and remains prepared to act if inflationary pressures become long-lasting.