Govt may go for phased hike in fuel prices

Rishi Ranjan Kala | | Updated on: Mar 09, 2022

Increase of ₹5-7 per litre on the cards, say sources

As global crude oil prices see-saw at 14-year highs with no respite in the short term, the government is expected to increase prices of petrol and diesel, which have not been revised since November 4 last year, in the range of ₹5-7 per litre. However, to reduce inconvenience to the end-consumer, the price hike is expected to be staggered, highly placed sources told BusinessLine.

Hiking prices is a tight-rope walk for the government in this scenario. Oil marketing companies (OMCs) are bleeding due to a steep fall in net marketing margins and lose around ₹12 a litre. The OMCs would require the price hike to be in the same range to break even. At the same time, the government has to ensure that citizens are not overburdened.

ICICI Securities in a report on March 4 had said that OMCs need a massive price hike of ₹12.1 per litre on or before March 16 just to break even and a price hike of ₹ 15.1 is required for net margin to be ₹ 2.5 per litre on March 16, 2022. Besides, with high crude oil prices and a weak rupee, the import bill will swell further and there would be an adverse impact on the current account deficit.

“The crude oil scenario is highly dynamic and volatile. For now, the government is considering raising prices in the range of ₹5-7 per litre for petrol and diesel. Also to soften the impact on end users, a staggered hike (as undertaken previously) is expected. In general, a $1 rise in crude oil means a 50 paise increase in retail price of auto fuels,” an official told BusinessLine.

The same official pointed out that OMCs had a small window of gains during November-December 2021, which would have, to some extent, balanced some of the losses. Prices of petrol and diesel have remained unchanged since November 4, 2021, even though Brent crude prices fell to $70 per barrel in December. The spot price of Brent crude oil, a global benchmark, entered 2021 at $50 per barrel and rose to $86 a barrel in late October before declining in the final weeks of the year averaging at around $71 per barrel.

Price volatility

Price volatility remains a big concern. The current week began with Brent crude oil scaling $139.13 per barrel on Monday, before easing, which is the highest since 2008. Back home, the crude oil (Indian Basket) FOB price on Tuesday stood at $126.55 a barrel at an exchange rate of ₹76.88 per US dollar, data compiled by the Ministry of Petroleum and Natural Gas showed.

As per ICRA, the price of Indian crude oil basket has averaged at $114.6 a barrel so far in March 2022 (March 1-7), a steep 22.9 per cent surge relative to $93.3 a barrel in February 2022.

The weakening rupee against the US dollar is also a concerning development for the Indian economy, particularly the widening Current Account Deficit (CAD). S&P Global Ratings said on Wednesday, “Substantially higher energy prices and volatility will likely strain the currencies and asset markets of many Asia-Pacific countries. This pressure will be strongest where higher energy prices pressure inflation targets—such as India, the Philippines, Korea, and Thailand. Or it could cause sizable CADs – in India, the Philippines, and Thailand.”

Published on March 09, 2022
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