RBI Confronts Double-Edged Dilemma with Petrol Price Hikes

Fuel Price Hike: A Necessary Evil in the Face of Global Uncertainty

The latest ₹3 increase in petrol and diesel prices may have been anticipated by many Indians, given the sharp rise in crude oil prices from $75 a barrel to $120 in less than four months. This surge, coupled with ongoing geopolitical tensions, has left the market wondering if this is just the first step in a series of price hikes.

India's oil marketing companies (OMCs) have been struggling to cope with the increasing crude prices, and the deregulation of petrol and diesel pricing policy is aimed at supporting them. The ₹3 hike announced on Friday morning is a necessary step to ensure the OMCs' viability.

Why India's Fuel Pricing Differs

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Unlike in the West, where crude prices fell from $100 to $60 after the pandemic, Americans paid significantly less for fuel. In contrast, consumers in Mumbai continued to pay around ₹103 for a litre of petrol, despite global crude prices fluctuating. This disparity suggests that India's fuel pricing mechanism is not entirely aligned with global market trends.

The RBI's Twin Challenges

The Reserve Bank of India (RBI) faces two major challenges when it comes to fuel prices: the absolute price of crude oil and the INR-USD exchange rate. The latter has become increasingly unpredictable, making it difficult for the RBI to set interest rates and control inflation.

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The RBI targets a Consumer Price Index (CPI) inflation rate of 4 percent, with a plus-or-minus 2 percent buffer. Fuel prices, both directly and indirectly, have a 15-20 percent impact on CPI inflation.

Rupee Depreciation Adds Pressure

The depreciation of the Indian rupee, which has moved from 85 to 96 in less than a year, adds another layer of uncertainty to the fuel pricing mechanism. This is particularly concerning for a country that does not procure crude oil in its home currency and remains dependent on the US dollar for pricing.

Why Cosmetic Deregulation Suits Policymakers

In the face of global uncertainty, a cosmetic petrol price deregulation suits everyone. The underlying point is simple: people prefer certainty and predictability. A full deregulation of fuel prices could lead to more uncertainty, making a cosmetic deregulation a more palatable option for policymakers.