India's decision to raise petrol and diesel prices for the first time in four years may only be the beginning of a broader fuel price adjustment cycle, with brokerages warning that consumers could face cumulative hikes of 10-15% if global crude oil prices remain elevated amid the ongoing West Asia conflict.
The government increased petrol and diesel prices by Rs 3 per litre and CNG prices by Rs 2 per kg with immediate effect, marking the first retail fuel price hike since the Russia-Ukraine conflict-driven increases in March-April 2022. Analysts believe the move signals the start of a staggered pass-through of higher global energy prices to consumers after oil marketing companies absorbed mounting losses for weeks.
According to BofA Securities, the latest increase is likely to add around 15 basis points to headline consumer inflation across May and June. However, the brokerage expects further hikes ahead as the gap between wholesale and retail fuel inflation remains substantial. Wholesale price inflation has already surged due to rising global crude prices, with April WPI inflation climbing to 8.3%, the highest in nearly three-and-a-half years.
Fuel inflation has emerged as the primary driver of wholesale inflation. Petrol and diesel prices within the WPI basket rose sharply in April, while categories such as aviation turbine fuel, LPG, diesel, furnace oil and naphtha recorded steep month-on-month increases. Analysts believe this pressure is beginning to spill into broader manufacturing costs, potentially squeezing corporate margins over the coming quarters.
BofA Securities said it has already factored in a cumulative 10-15% fuel price increase in its FY27 assumptions, based on crude oil averaging around $95 per barrel. While the initial Rs 3 per litre increase may reduce daily losses for oil marketing companies, the brokerage expects additional rounds of price hikes in the coming weeks.
Meanwhile, CLSA warned that India's economy remains highly sensitive to crude oil prices due to the country's growing import dependence. Domestic crude oil production has fallen to its lowest level this century, pushing import dependency to around 89%, up sharply from 81% a decade ago.
The brokerage estimates that every $10 per barrel increase in crude oil prices widens India's current account deficit by nearly $19 billion, or 0.5% of GDP. If crude averages between $90 and $100 per barrel in FY27, CLSA expects India's current account deficit to widen to 2.1%-2.5% of GDP from around 1% projected before the latest geopolitical tensions intensified.
The pressure is also expected to weigh on the rupee. CLSA estimates the currency could weaken towards Rs 97 per dollar before stabilising later in the year, while another domestic brokerage expects the rupee to edge closer to Rs 97.5 per dollar if the Middle East conflict persists and crude prices remain elevated.
Despite these risks, brokerages believe the economic impact remains manageable as long as crude stays near the $100 per barrel mark. CLSA projects CPI inflation could remain around 5% if fuel price pass-through remains gradual and limited, allowing the Reserve Bank of India to potentially avoid aggressive monetary tightening.
Analysts also believe the government is deliberately opting for phased fuel hikes to avoid a sharp spike in retail inflation and minimise second-order effects on consumption. Brokerages observed that the staggered approach would help spread the inflationary impact over multiple months while allowing policymakers to monitor demand conditions more closely.
Brokerages also expect additional policy steps if crude prices remain elevated, including tighter foreign exchange conservation measures and possible moderation in Liberalised Remittance Scheme limits in select categories.
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