Reserve Bank of India Governor Sanjay Malhotra has suggested that India may have to raise petrol and diesel prices if the ongoing tensions in the Middle East persist for an extended period. As crude oil prices show an upward trend, these increases have been putting pressure on inflation, fuel imports, and the nation’s overall economy. Malhotra noted that the government might find it challenging to maintain current retail fuel prices indefinitely if global energy conditions deteriorate further.

During a recent conference hosted by the Swiss National Bank and the International Monetary Fund, he stated, “If this is to continue for a longer period of time, it is just a matter of time before the government will pass on some of the price increases.” His comments underscore the critical nature of the energy crisis affecting India’s fuel costs.

Impact of The Strait of Hormuz Crisis on Energy Supplies

India, being the world’s third-largest oil consumer, is facing significant pressures due to escalating tensions surrounding the Strait of Hormuz, a crucial route for global oil supplies. Reports indicate that disruptions in this shipping lane have led to soaring crude oil prices, raising alarms about potential supply chain challenges and resulting inflation, compounded by an increasing energy import bill for the country.

Given that India relies heavily on imports for its oil requirements, elevated crude oil prices lead to increased costs for transportation and manufacturing, causing additional strain on the rupee and fuelling inflation concerns. The government faces looming economic implications if these prices continue their upward trajectory.

Currently, both the government and state-run oil companies are absorbing the brunt of these increased crude oil costs. The reduction of excise duties on fuel has been an initial response, although oil marketing firms are still selling petrol and diesel below market-linked prices despite accumulating losses.

Government and Oil Companies’ Strategies for Cost Absorption

While fuel prices for petrol, diesel, and domestic LPG have remained stable for the time being, certain fuel products have seen price hikes. Notable increases include commercial LPG cylinders, industrial diesel, and jet fuel supplied to international airlines. For instance, the price of a 19-kg commercial LPG cylinder was raised by Rs 993 recently.

Prime Minister Narendra Modi’s recent appeals to the public for fuel conservation come amidst concerns over the sustainability of keeping fuel prices low. Oil Minister Hardeep Singh Puri highlighted worries regarding the capacity of oil companies to continue absorbing losses while maintaining current pricing levels, stating, “How long will the oil companies be able to take it? Frankly, that worries me.”

International Oversight and Economic Projections

The International Monetary Fund has expressed support for the idea of passing on higher crude oil prices to consumers, while acknowledging that India still maintains some flexibility to manage the ongoing energy challenges. The fuel market in India remains primarily under the control of state-owned refiners, which command approximately 90 per cent of the country’s retail fuel outlets.

As India’s retail inflation increased to 3.48 per cent in April from 3.40 per cent in March, the projection of further price rises has become a matter of concern. Economists are apprehensive that sustained high oil prices could adversely affect growth, further inflate costs, weaken the rupee, and widen the current account deficit.

The Reserve Bank of India has predicted a 6.9 per cent growth rate for the current financial year along with an average inflation rate of 4.6 per cent. With the repo rate stable at 5.25 per cent in April, Malhotra assured that the RBI’s policy will remain data-driven, with readiness to respond should inflationary pressures prove long-lasting.

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