Fuel prices start rising, but may be cushioned by strong rupee

Inflation scare has reared its head with retail petroleum prices consistently rising since the election results were declared on May 23.

As per the rates available on the Indian Oil Corporation (IOC) website, they have risen by over 40 paise in the four metros in the last four days.

The pump prices have stayed more or less stagnant for the last few months, including the election period, while the global crude oil prices had shot up.

Most experts believe that the fuel prices are likely to increase further but could be pinned down by favourable currency exchange rate.

Economists say higher fuel prices may not translate into scorching inflation as companies do not possess pricing power due to lack of consumption demand in the economy.

DNA Money had reported on May 6 that there would be a steep petrol price hike after Lok Sabha elections.

It had reported that even though the Indian basket for crude oil price had scaled up 37.33% to $72 per barrel from at $52.43 per barrel on January 2, petrol price had not moved up proportionately. For instance, during the same period, it was up by 6.37 to Rs 70.45 per litre from Rs 66.23 per litre.

That prognosis seems to be coming true with petrol prices finally inching up after remaining stable over the past few months. It had shot up to over Rs 80 per litre in October last year and then stayed at around Rs 70-75 per litre since the beginning of this year.

According to Petroleum Planninng and Analysis Cell (PPAC), the Indian crude basket prices have moved up 23% from $57.77 per barrel in December 2018 to $71 in April. Despite this rise, pump prices of petrol have not changed much.

However, they have only been climbing up since Thursday last. In Mumbai, the petrol price increased 42 paise to Rs 77.28 per litre from Rs 76.86 per litre. Kolkata and Chennai also have seen a rise of 41 paise and 44 paise respectively in petrol prices during this period.

Ranen Banerjee, leader, PwC India, told DNA Money higher oil prices may not lead to inflation as the consumption demand is currently low and so it will not be easy for companies to increase prices.

He said the producers or manufacturers are likely to face inflationary pressures from oil prices, but would not be able to pass it on to consumers due to his limited pricing power.

"There is inflationary pressure because of the oil prices but ability of the producers to pass on those higher costs to the consumer is limited, given the weak consumption demand. So how much of that price increase owing to oil will be absorbed by producers and how much of it is passed to consumers will depend on his pricing power. Currently, it is weak because of the weaker consumption demand," he said.

Debasish Mishra, leader, energy, resources and industrials for Deloitte India, said many elements were taken into consideration while computing pump prices by oil marketing companies including IOC, HPCL and BPCL. And therefore, rise in crude prices may not necessarily lead to a proportionate increase in pump prices of fuel.

"They (fuel prices formula) have different elements, crude is just one part of it. value-added tax (VAT) is a fixed element. Then, there are central excise duty, refinery margin, marketing margin and exchange rate. Crude is just one-third of the whole thing," he said.

According to him, since the exchange rate, which was a major component, has been favourable, the pump prices may be kept in control.

"Thankfully, Indian exchange rate is pretty favourable. Rupee is around 69.30 per dollar. Therefore, you may not need a big hike," he said.

Another economist with a leading management consultancy firm, who spoke anonymously, also said he did see pump prices rising to Rs 99 per litre.