The Reserve Bank of India’s current inflation target is 4 per cent (with a tolerance band of plus or minus 2 per cent). Reportedly private fuel retailer Nayara Energy has raised petrol prices by Rs 5 per litre and diesel by Rs 3 per litre. Public sector oil marketing companies have so far kept the retail prices unchanged. The Indian government last week cut excise duty on petrol to Rs 3 per litre from Rs 13, while on diesel it is reduced to nil from Rs 10.
LPG prices have been increased by Rs 60 per cylinder. Nevertheless, transport inflation has a combined weight of 14.2 per cent in overall Consumer Price Index and could be the first to face pressures from higher oil and gas prices due to supply shocks.
A 10 per cent rise in global crude oil prices may result in an increase in inflation by 30 basis points and GDP growth may be negatively impacted by around 15 basis points. A USD 10 per barrel increase in crude oil price will increase India’s current account deficit by 0.3 per cent of the GDP. It is said that the crude prices should remain over USD 100 per barrel for a sustained period to reflect its impact on the economy.
If the crisis persists, it could stoke inflationary pressures and put pressure on the exchange rate (the Indian Rupee is already under pressure making new lows). Besides, sectors dependent on crude and natural gas supplies could be impacted. These include fertilisers, petrochemicals, tyres, aviation (already airlines have introduced fuel surcharge amid jump in aviation turbine fuel prices), ceramics and export-oriented sectors.