Petrol, diesel price surge may lift CPI inflation by up to 48 bps, RBI likely to watch spillover risks: Crisil
New Delhi, June 2
The Reserve Bank of India may look through the immediate supply-side impact of higher oil prices in its monetary policy, but the escalating fuel costs are increasing the risk of broader inflationary pressures across the economy, says a report by Crisil.
Retail petrol and diesel prices have increased by about Rs 7.5 per litre since May 15 and further hikes can be expected if crude prices remain elevated. "The direct upside to inflation linked to the Consumer Price Index (CPI) is estimated at ~36 basis points (bps) with a hike of Rs 7.5/litre in petrol and diesel prices, rising to ~48 bps if the retail fuel prices increase by Rs 10," the report said.
While the CPI inflation currently remains below RBI's 4% target, as per Crisil "it is projected to move up but not cross the upper limit 6% tolerance band."
"With oil marketing companies gradually paring their losses (or under-recoveries), cumulative hikes could move closer to Rs 10/litre in the near term. The broader effect will reverberate across the economy through higher transport costs, pushing up both food and core inflation," it said.
"Crude prices have averaged ~$112/barrel for the first two months of this fiscal, with our base case expectation at ~$95/ barrel for the full fiscal," the report added.
It said transport is a major channel through which fuel inflation radiates across the economy.
"While freight transport accounts for 54%2 of India's logistics cost, road transport represents nearly 71%3 of total freight movement. The increase in retail fuel prices will directly impact these freight costs structures and feed into prices across supply chains in the coming months," Crisil said.
"We expect the RBI Monetary Policy Committee (MPC) to look through these supply-side impressions on CPI price inflation. But it is likely to remain watchful of spill-over risk to household inflation expectations, and the possibility of the second round leading to generalization of price pressures," the report said.
Crisil further noted that the "implications of expected below-normal monsoon and evolving El Nino conditions on food inflation will also be monitored."
— ANI
Reader Comments
The RBI is in a tough spot. They can't just raise rates aggressively because that would hit investment and jobs. But letting inflation creep up hurts savers and the poor. I feel for households already struggling with food prices. Hope the monsoon is good this year 🤞
Crisil's analysis is spot on. The transport cost spillover is the real worry. Every trucker passing through tolls and filling up at pumps will pass on costs to consumers. We should also look at reducing excise duty to cushion the blow, at least temporarily.
I run a small transport business. Diesel is killing us. Our profit margins have shrunk by half in the last month. We can't raise freight rates too much because customers already complain. Something has to give - either government cuts taxes or oil companies absorb some loss. This is not sustainable.
Well, at least the RBI is being sensible about not overreacting. The supply-side shocks will eventually fade if crude stabilizes. But the government must also act - cut excise duty by Rs 5-6 per litre to give immediate relief. Every rupee counts for families managing tight budgets these days.
The real issue is our dependence on imported oil. Until we shift to EVs and renewables, we'll be at the mercy of global prices. Short-term, yes, we need relief. But long-term, this is a wake-up call for energy independence. Think of the savings if even 30% of transport went electric 🚗⚡
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