A hike in petrol and diesel prices has been anticipated for several weeks, and today's Rs 3 per litre increase comes as no surprise. This is especially true given the lack of an early resolution to the US-Iran conflict and persistently high global crude prices, which are raising India's oil import bill. Since the war began at the end of February, India had been one of the few countries not to raise fuel prices despite the global oil supply shock.
India had kept petrol and diesel prices unchanged for four years, ever since the Russia-Ukraine conflict. However, rising global oil prices, now past the $100 per barrel mark, have made the situation unsustainable for oil marketing companies (OMCs).
After today's hike, petrol is retailing at Rs 97.7 per litre in Delhi, while rates in Mumbai, Kolkata, and Chennai are Rs 106.68, Rs 108.74, and Rs 103.67 respectively. Diesel in Delhi costs Rs 90.67, while in Mumbai, Kolkata, and Chennai it costs Rs 93.14, Rs 95.13, and Rs 95.25 respectively. The rates vary across cities due to state-level value-added taxes, as petrol and diesel are not under GST.
Why Was a Hike Inevitable?
The US-Israel-Iran war began over two months ago, yet India did not raise fuel prices initially. So, what compelled the government to finally allow state-run OMCs to hike rates?
Several statements over the last week had hinted at a revision. Prime Minister Narendra Modi called for austerity measures to cut fuel consumption and save forex reserves. Oil Minister Hardeep Singh Puri pointed to mounting OMC losses, and RBI Governor Sanjay Malhotra noted that if the oil supply and price shock continues, consumers would eventually have to bear the hike. Today's increase comes from state-run OMCs—Indian Oil, Bharat Petroleum, and Hindustan Petroleum. Private fuel retailers like Nayara and Shell had already raised prices in March. Domestic cooking gas LPG prices were also hiked by Rs 60 per cylinder in March.
With the closure of the Strait of Hormuz, oil supply disruptions have caused crude prices to skyrocket. Global crude oil prices surged from $70-72 per barrel before the Middle East conflict to above $120 at one point, and are now hovering above $100, in the $104-110 range. The crude oil basket India imports averages around $113-114 per barrel, up from $69 in February.
Crude oil is the raw material refined into petrol and diesel. The massive surge in oil prices means oil retailers pay much more for procurement. With retail prices unchanged, OMCs were incurring huge losses.
Why Were Prices Not Revised Earlier?
Apart from possible political reasons linked to state elections, the first step to avoid a revision was the government's excise duty cut. On March 27, the government reduced excise duty on petrol and diesel by Rs 10 per litre each to cushion consumers from rising global crude prices. This meant a tax revenue hit for the government. Despite this, oil companies were losing as much as Rs 14 per litre on petrol and Rs 42 per litre on diesel before Friday's decision.
Earlier this week, Oil Minister Hardeep Singh Puri said the three state-run fuel retailers were losing around Rs 1,000 crore per day to keep prices unchanged. He added that cumulative losses in a quarter could wipe out all the profit these companies made in a full year, estimating losses at about Rs 1 lakh crore.
Is This the First of More Hikes?
According to a PTI report, industry sources say the price hike appears calibrated—enough to partially ease margin pressure on oil companies without creating a major inflationary shock. Experts and economists believe this may be just the beginning of staggered increases.
Radhika Rao, Executive Director and Senior Economist at DBS Bank, draws on historical data to suggest further hikes are likely. "Back in 2022, increases in pump prices were staggered. This time, given the sharp rally in global crude prices and limited signs of an imminent end to the conflict, we could see one or two additional modest increases, taking the cumulative increase to around 10%," she said.
Madan Sabnavis, Chief Economist at Bank of Baroda, agrees: "The present hike of Rs 3 per litre is a start to compensate OMCs for losses. This may not be the sole hike, and we could expect more depending on evolving conditions. Small hikes have a better impact on consumer sentiment." He added that OMCs can track global developments before subsequent hikes, as they affect inflation and policy decisions.
The key to further price hikes lies in the duration of the US-Iran conflict, the closure of the Strait of Hormuz, and the broader trend of global crude oil prices.
Ranen Banerjee, Partner and Leader, Economic Advisory Services, PwC India, sees today's hike as a partial pass-on of costs. "Future actions will depend on how long the conflict continues and crude price trends. If it remains at current levels, there could be more staggered increases," he said.
Sachchidanand Shukla, Group Chief Economist at L&T, said, "If global crude and LPG prices remain elevated for elongated periods, the government will have to further raise petrol and diesel prices along with providing some support to OMCs on LPG." He noted that the Rs 3 hike is a staggered response to the near three-month-old West Asia crisis, providing some relief to OMCs incurring gross marketing margin losses of Rs 15-20 per litre on petrol and diesel.
According to a PTI report, the Rs 3 per litre hike is just about one-tenth of the increase needed to compensate for OMC losses from higher crude oil prices. The government had already tried to absorb part of the higher crude oil price bill by cutting excise duties, but that proved insufficient to counter crude above $100.
The bottom line is clear: If this trend continues, it may only be a matter of time before retail prices of petrol and diesel are raised again.
