NEW DELHI: The Rs 3/litre hike in petrol and diesel prices could push retail inflation up by nearly 15 basis points in the short term, economists said. They expect more such price increases over the next few weeks, as oil marketing losses of oil marketing companies remained to be offset, and crude prices might remain elevated for longer periods.
Some of them expect hikes up to Rs 10/litre including the instant one, in retail fuel prices over the next couple of months if crude oil prices remain high. Factoring this in, retail inflation could average 5% in FY27.
The hike, anticipated amid West Asia tensions and widening under-recoveries, is expected to transmit through the CPI basket directly via fuel weights and indirectly via higher transportation, freight, logistics, and agricultural input costs. On monetary policy, most economists expect the RBI to maintain a pause in the near term while monitoring second-round effects.
The oil marketing companies (OMCs) on Friday raised petrol and diesel prices by over Rs 3 per litre each, along with a Rs 2 per kg increase in CNG. Petrol and diesel have a combined weight of 4.81% in the Consumer Price Index (CPI) basket. Economists estimate the immediate direct impact of the fuel hike at 12-20 basis points, with total effects—including secondary pass-through—likely ranging between 15-30 bps over the coming months. This is expected to lift May CPI prints and keep inflation elevated through Q1FY27, though views vary on the magnitude of indirect effects.
Madan Sabnavis, Chief Economist at Bank of Baroda said, “The immediate impact is around 0.15% as a 3% increase translates to this inflation number.” He added that the 9% additional duty on gold and silver could contribute another 12 bps. He noted secondary effects from rising transport fares would push the overall addition closer to 30 bps spread over 3-4 months. Sabnavis expects inflation to cross 4% in May and approach the 5% mark for the full year.
Retail inflation rose to a 3.48% year-on-year in April as price pressures were yet to build up in most non-food items, except precious metals, despite the risks posed by the West Asia war. Wholesale price inflation recorded a sharp rise to 8.3% in April from 3.88% in March, indicating strong price pressures at the producer level.
Aditi Nayar, Chief Economist at ICRA Ltd, expects the fuel price hike to push up the average CPI inflation print by 25 bps on an annualised basis, spread over the May and June prints, and has revised the May forecast to 4.3% from 4.1%.
Since the increase comes mid-month, average fuel prices for May would reflect 50% of the hike’s pass-through, with the balance seen next month. Vivek Kumar, economist at QuantEco, said the Rs 3 hike would push inflation by 20bps in May and June.
Megha Arora, Director at India Ratings & Research, presented one of the higher combined estimates, factoring in the milk price hike. Petrol, diesel, and milk price increases together are likely to raise CPI inflation by around 42 bps, with the actual impact expected to be higher through user industries such as transportation, freight, e-commerce, coastal fishing, and aqua farming. She noted the fuel pass-through alone would add about 15 bps, with the May impact around 20 bps, potentially taking retail inflation to 3.8%.
Rajani Sinha, Chief Economist at Care Edge, underlined a direct impact of 15 bps from fuel with indirect pressures through transportation, freight, logistics, and agriculture adding another 10-15 bps. She expects CPI to average 4.6-5.0% and observed that the hike only partially mitigates OMC losses.
Gaura Sengupta, Chief Economist at IDFC First Bank, assessed the direct impact at 12 basis points, potentially rising to 15-16 bps with minimal indirect effects. Assuming a cumulative Rs 10 hike spread over the next couple of months, inflation could average 4.6% with second-round effects or 4.9% when including food inflation, peaking around 5.5% in Q3. Kumar noted that another ₹5-10/litre hike over coming months is “quite likely,” potentially adding 90–100 bps in a broader scenario involving LPG adjustments and pushing inflation toward 5-5.5%.
Sakshi Gupta, Principal Economist at HDFC Bank, said the change in price needed to fully offset the under recoveries is Rs 11 per litre for petrol and Rs 23 per litre for diesel. She, however, does not anticipate a further increase in pump prices in the coming weeks given the recent upward revision. “Any further increases are likely to depend on whether oil prices remain elevated or increase further on a sustained basis over the coming months.”
Sengupta highlighted that domestic financial conditions have already tightened, making a pause prudent. “This is a twin shock. It is a price plus supply shortage. We have only seen the impact of price. Supply shortages will start coming in Q3. …We can look through it and stay on pause as long as it’s not really reaching 6%,” Sengupta said.
Sabnavis sees status quo in the upcoming policy but at least one rate hike by end-2026. Meanwhile, Kumar noted the RBI would focus on core inflation and wait one to two quarters to assess pass-through.
Source: The Financial Express
