DNA Explainer: How fall in Indian rupee can increase the petrol, diesel price in India?

On Tuesday, the petrol price was hiked by 20 paise per litre and diesel by 25 paise as international oil prices neared USD 80 per barrel mark for the first time in three years. The diesel price saw a 75 paise increase in Delhi from Monday's rate. This is the fourth increase in diesel price in the last five days.

However, for petrol, this hike comes after a lull of almost two months. The price of petrol was hiked to Rs 101.39 a litre in Delhi from Rs 101.19 and to Rs 107.47 per litre in Mumbai. Diesel rates went to Rs 89.57 a litre in Delhi and Rs 97.21 in Mumbai. So what determines the increase in petrol and diesel prices in India?

As per experts, there are at least five factors that determine the final retail price of fuel. These include the price of the key raw material and crude oil, the exchange rate for the US dollar against the Indian rupee, the cost of refining, government taxes and the level of consumer demand.

In India, petrol and diesel prices have set a new record, pushed by a combination of rising fuel prices and the falling rupee. The exchange rate has fallen to a record Rs 73.99 a dollar. Here we try to understand how the fall in the Indian rupee results in an increase in petrol and diesel prices.

How fall in Indian rupee increases fuel price

India imports over 80% of its oil needs from Arab and other European countries including the United States.

Oil is mostly purchased in dollars from the international market meaning the exchange rate of rupees against the US dollar has a direct impact.

A stronger dollar means it gets more expensive to pay for oil in the Indian rupees, even if the overall price of oil may be falling.

A stronger dollar means India will have to pay more for the same quantity of oil even if the price doesn't change in the international market.

So, the higher the value of the dollar, the more the importers have to pay for crude oil (or for any commodity for that matter).

The appreciation of the dollar against the rupee also pushes rates for compressed natural gas (CNG) as well as piped natural gas (PNG).

This is because the price of gas procured by city distributors is mostly dollar-denominated.

Oil purchase from Iran

A huge part of India's fuel demand was met from oil imports from Iran. As per the agreement, India was to import oil using a rupee-based payment mechanism.

50 per cent of the payment towards oil imports would be earmarked for clearing off the payments due to the exporters of other goods from India.

India's main exports to Iran include rice, tea, steel and pharmaceuticals.

The main import of India from Iran was crude oil as India used to meet about 10% of its oil requirement from imports from Iran until recently.

The rupee kitty with Iran began to shrink soon after India completely stopped crude oil imports from the country around six months ago.

The ongoing tussle between Iran and the United States led to a situation wherein Indian exporters started experiencing payment problems.