After more than four years, petrol and diesel prices were raised by ₹3 per litre, or more than 3%, on Friday, while CNG prices also went up by ₹2 per kg in Delhi and Mumbai. While the hikes aim to offset losses from soaring crude oil prices, the bigger concern now is their cascading impact on retail inflation in the coming months.
Madan Sabnavis, Chief Economist, Bank of Baroda, says, “Given the losses being incurred by oil marketing companies (OMCs), a rise in petrol and diesel prices was inevitable.”
But, what remains unclear, however, is whether this is a one-time increase or the beginning of a series of hikes. “My assumption is that there could be another round of increases, as a ₹3 per litre hike may not be sufficient to fully offset the losses faced by OMCs,” he adds
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How does the recent fuel price hike impact inflation in India?⌵
The fuel price hike has a direct impact of about 0.15% on consumer price inflation due to petrol and diesel’s weight in the CPI. However, the indirect effects, such as increased transportation and food costs, are expected to be more significant and emerge over the next few months.
What is the primary reason for the increase in petrol and diesel prices?⌵
The primary reason for the recent hike in petrol and diesel prices is the significant rise in global crude oil prices, which surged past $120 a barrel due to disruptions in the Strait of Hormuz following conflict in West Asia.
Which sectors are most likely to be affected by the fuel price increase?⌵
Sectors such as agriculture, food, FMCG, steel, e-commerce, and tourism are expected to face the most immediate impact. This is due to rising fuel and transportation costs leading to higher operating expenses for these industries.
Why have fuel retailers stopped daily price revisions?⌵
State-run fuel retailers stopped daily price revisions in April 2022 to shield consumers from soaring global oil prices, especially after Russia’s invasion of Ukraine. They incurred losses but later recouped them when rates fell, before recent global events pushed prices up again.
What is the indirect impact of higher diesel prices on daily expenses?⌵
Higher diesel prices increase transportation costs for goods, which eventually affects the prices of essential items like groceries, vegetables, and milk. This can reduce household savings and discretionary spending, impacting overall consumption.
Global oil prices surged past $120 a barrel after the Strait of Hormuz was severely disrupted and partially shut following the conflict triggered by the U.S.-Israeli attacks on Iran. Prices later eased, retreating to the $100–$105 per barrel range. Before the conflict in West Asia, crude oil was trading below $75 per barrel, which implies that there was a more than 50% jump in the matter of three months.
India is one of the last major economies to raise retail fuel prices.
How fuel price hike will impact retail inflation?
The direct impact of the fuel price hike would be muted at about 15 basis points on consumer price inflation, although the indirect impact will be larger, said Madhavi Arora, chief economist at Mumbai-based Emkay Financial Services, as reported by Reuters.
Elaborating on it further, Sabnavis says, “From an inflation perspective, the impact is significant. Petrol and diesel together carry a weight of nearly 5% in the Consumer Price Index (CPI). A ₹3 increase roughly translates into a 3% rise in fuel prices, which alone could have a direct impact of around 0.15% on inflation. To this, we must also add the effects of the earlier hikes in LPG and CNG prices. So, there will certainly be upward pressure on inflation.”
But this is only the primary impact.
“The secondary effects could be much broader. Higher CNG prices typically lead to an increase in auto fares, while higher diesel prices raise transportation costs. As transportation becomes more expensive, the impact filters through multiple sectors of the economy, including agriculture. This, in turn, can push up food prices as well.”
Which sector will be most impacted?
The sectors likely to face the most immediate impact include agriculture, food, FMCG, steel, e-commerce and tourism, as rising fuel and transportation costs are expected to push up operating expenses
So, the way to assess the situation is to distinguish between the direct and indirect effects on inflation. The direct impact may be visible immediately in the index, but the indirect effects are likely to emerge gradually over the next couple of months
How much could fuel price hikes push up retail inflation?
Even if 60% to 70% of the increase in fuel prices is passed on to consumers, the overall impact on inflation may not be very significant, says Sujan Hajra, Executive Director, Chief Economist, Anand Rathi
“”Even if fuel inflation crosses 10%, headline CPI inflation is still likely to remain around 5%. Of course, the base effect could influence the overall inflation trajectory, but even after accounting for that, inflation is expected to stay broadly within the 4.5% to 5% range.”