With global crude oil prices slipping below $70 a barrel, economists reckon there is a strong case for a fuel price cut for Indian consumers, stressing that cheaper petrol and diesel would also help slow inflation, paving the way for interest rate cuts, and boost consumption.
While fuel prices are deregulated in India with oil marketing companies (OMCs) free to reset prices, in practice, prices have not been reset in line with supply price trends for a few years now. Retail prices for petroleum products have been static since March, when they were reduced by ₹2 a litre ahead of the general election.
“We believe that there is a strong case for another cut in fuel prices possibly by ₹2 to ₹4 per litre if global crude prices continue to remain below $75 per barrel over the next one-two months,” averred Suman Chowdhury, executive director and chief economist at Acuité Ratings & Research. “The decision on the price cut may also be influenced by the upcoming State elections in Maharashtra and Haryana,” he added.
“Given that India imports around 87% of its crude oil requirements, any significant price reduction always augurs well for the economy,” he said, adding that OMCs’ margins had risen notably in the current quarter.
Bank of Baroda chief economist Madan Sabnavis said that softening oil prices would help control India’s import bill and stabilise the rupee, but the impact on retail inflation would depend on government action.
“The products where prices are driven by market like ATF should move downwards. However, fuel prices at the petrol pumps will depend on whether the Centre and States decide to pass on the benefit,” he noted.
Even if retail fuel prices remained unchanged, Mr. Sabnavis underlined that wholesale price inflation would face downward pressure if oil prices stayed in the $70-$75 range, while the government would see a lower subsidy bill on LPG and fertilisers.
While there were concerns about the implication of the fundamentals driving the dip in oil prices, such as a slowing global economy, Mr. Chowdhury said if the fuel price cuts materialised, they would support the expected downtrend in the headline inflation trajectory, which already had the ‘tailwinds of a good monsoon’.
“It may further put pressure on RBI to opt for a rate cut in December. Lower inflation along with a cut in interest rates is likely to strengthen consumption demand and overall economic growth,” the Acuité economist emphasised. Some manufacturing sectors would also see better margins, while domestic airlines could get some relief due to lower ATF prices, he noted.
Further, manufacturing sectors that have a significant dependence on crude oil derivatives were also expected to see an improvement in margins in the near term. Some of these sectors, where volume growth has been relatively low, may also opt to improve the latter by passing on some of the benefits to the consumers. The transport sectors including domestic airline companies were also set to get relief due to lower ATF prices.
Published - September 16, 2024 09:08 pm IST
