Petrol, diesel prices have room to rise ahead. How does it impact inflation

On June 9, petrol per litre is available at 96.72 in the national capital, while the price is at 106.03 in Kolkata, 111.35 in Mumbai, and 102.63 in Chennai.

Further, a litre of diesel is available at 89.62 in Delhi, the price was 92.76 in Kolkata, 97.28 in Mumbai, and 94.24 in Chennai.

As per Goodreturns, among metro cities, petrol is highest in Mumbai, meanwhile, diesel is costliest in Hyderabad.

Last month, Finance Minister Nirmala Sitharaman reduced excise duty on petrol by 8 per litre and diesel by 6 per litre.

Oil marketing companies (OMCs) BPCL, HPCL, and Indian Oil revise fuel prices on a daily basis taking into consideration international crude prices, excise duty, Value Added Tax (VAT), dealer commission, and freight charges.

In its latest treasury research note, HDFC Bank expects CPI inflation at 6.9% in May this year. The bank expects inflation to stay above RBI’s upper target of 6% till December-end. However, the bank expects inflation to be 4.7% by March 2023-end.

HDFC Bank stated that they expect CPI Inflation to average at 7.3% in H1 FY23 and ease to 6.2% in H2 FY23 assuming crude oil prices average at $105 per barrel in FY23. For the full FY23, CPI inflation is expected to average in the range of 6.5-6.7%, assuming a normal monsoon, some moderation in global commodity prices in H2, and elevated services inflation.

“Our forecasts also consider recently announced excise duty cuts on petrol and diesel, although we assume that these could be partially offset by some pass-through of high crude oil prices to pump prices by Oil Marketing Companies (OMCs) to cover up their under-recoveries,” HDFC Bank’s report said.

As per HDFC Bank’s note, under-recoveries for petrol and diesel stood at 17 per litre and 20 per litre respectively as of 2nd June 2022, warranting a case for hiking petrol and diesel prices going forward.

Further, HDFC Bank’s treasury report points out that a 50% pass-through of these under-recoveries could mean 30 basis points increase in inflation while a 100% pass-through could imply a 55-60 basis points increase in headline inflation. For now, HDFC Bank assumes a pass-through lower than

the 50% scenario.

India’s consumer price index (CPI) inflation has reached an eight-year high of 7.79% in April 2022. Food inflation skyrocketed to 8.38% in the month. This would be the fourth consecutive month where inflation has stayed above RBI’s comfort zone.

In its bi-monthly monetary policy on Wednesday, RBI hiked the policy repo rate by 50 basis points to 4.9%. RBI also remained focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

“International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices,” RBI said in its June 2022 policy.

On the assumption of a normal monsoon in 2022 and an average crude oil price (Indian basket) of $105 per barrel, RBI raised its inflation target to 6.7% in 2022-23, with inflation in Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, with risks evenly balanced.

Post-RBI policy, Abheek Barua, Chief Economist, HDFC Bank said, “The central bank seemed far more concerned about inflation — reflected in its upward revision in its inflation forecast by 100bps to 6.7%—and relatively more sanguine on domestic growth impulses.”

“Clearly the RBI is concerned about the broad-based nature of the increase in inflation and the risk of the second-round impact on inflation expectations. Therefore, the policy rate is likely to be raised well beyond the pre-pandemic level, close to 6% by fiscal year-end,” Barua added.

The Indian government will be announcing CPI Inflation data for May 2022, next week on June 13.

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