Summary of this article
Fuel prices could eventually be raised in crude oil prices remain elevated
India imports nearly 90 per cent of crude oil needs
The Reserve Bank of India (RBI) Governor Sanjay Malhotra has warned that petrol and diesel prices in India may rise if global crude oil prices continue to remain high due to the ongoing tensions involving Iran and the United States. He said that while the RBI can look through temporary supply shocks, prolonged pressure on oil prices could eventually force manufacturers to pass on fuel price hikes to consumers.
Speaking at a conference hosted by the Swiss National Bank and the International Monetary Fund in Switzerland on May 12, Malhotra said India’s inflation management framework works well under normal conditions, but geopolitical crises such as the current West Asia conflict create new risks for the economy, Bloomberg reported. Rising crude oil prices could increase inflation, weaken the rupee and hurt economic growth.
"If this is to continue for a 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 the event.
India imports nearly 85-90 per cent of its crude oil requirement, making it highly vulnerable to global oil price shocks. The ongoing conflict has disrupted supply routes, with the Strait of Hormuz remaining blocked, one of the world’s most important oil shipping routes. Experts have said that if the situation worsens and oil prices remain above $100 per barrel for a long period, Indian consumers may eventually see higher fuel prices.
So far, the government has largely avoided increasing retail petrol and diesel prices despite the sharp jump in crude oil prices. Oil marketing companies have been absorbing much of the burden. However, experts believe this may not be sustainable for long if global prices continue to rise. Brent crude oil futures are currently around $107 per barrel, but had briefly breached above $120 per barrel during the height of tensions in West Asia.
Higher fuel prices could have a wider impact on the Indian economy. Transport and logistics costs may rise, pushing up prices of food and daily-use items. Economists have also warned that a weak rupee and concerns over an uneven monsoon could further add to inflationary pressure.
India’s retail inflation stood at 3.48 per cent in April, still below the RBI’s medium-term target of 4 per cent, but higher than market expectations. However, the central bank remains cautious as rising energy prices could change the inflation outlook in the coming months. Malhotra also indicated that the RBI is prepared to take policy action if inflation pressures become more persistent.
