New Delhi, May 25: Inflation worries are creeping into Indian households. Kitchen budgets are already under pressure from rising prices of vegetables, edible oils, and daily essentials. And yet, another round of fuel price hikes may still be on the horizon, say financial market experts.
Fuel prices were hiked on Monday — for the fourth time in the last 11 days. However, India’s three state-run oil marketing companies (OMCs) — Indian Oil Corporation, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited — are still staring at massive under-recoveries despite the recent increase in petrol and diesel prices.
In the last 11 days, petrol and diesel prices have been raised by over Rs 7 per litre through multiple hikes. The increases came in phases — Rs 3, 90 paise, 87 paise and Rs 2.61 per litre. However, according to financial market estimates, this may not be enough.
A Rs 20 Price Hike In Fuel Prices
To fully recover past losses and bridge the gap between input costs and retail selling prices, fuel prices in India would theoretically need to rise by another Rs 28 to Rs 33 per litre. That means even after the latest hikes, OMCs may still require at least Rs 20 more per litre to fully offset the losses accumulated over the past few months.
While such a steep increase is politically and economically unlikely, analysts say the possibility of more calibrated hikes cannot be ruled out. The reason lies in the extraordinary pressure that built up before the recent price revisions.
For 74 straight days, India’s OMCs absorbed losses as crude oil prices surged globally following the Iran conflict that began on February 28. During this period, international crude prices climbed sharply, increasing the cost of importing crude and refining fuel.
But retail petrol and diesel prices in India remained frozen.
That meant oil companies were buying expensive crude oil but selling petrol and diesel at older rates. The longer the freeze continued, the deeper the financial hole became.
By the time the first fuel hike was announced — days after assembly election results in five states — cumulative losses of the three OMCs had reportedly crossed Rs 1.2 lakh crore.
The burden was particularly severe because India imports nearly 88 per cent of its crude oil requirements. Therefore, any geopolitical disruption that lifts global oil prices directly impacts the country’s import bill and fuel economics.
Fuel Price Hikes Have Helped OMCs, But Not Fully
The latest hikes have helped reduce daily losses, but not eliminate them entirely.
According to analysts, every 50 paise increase in fuel marketing margins boosts the earnings before interest, taxes, depreciation and amortisation (Ebitda) of OMCs by nearly 7 to 11 per cent, depending on the OMC. This explains why even small fuel price hikes significantly improve profitability.
But the numbers also show how large the accumulated losses have become.
Industry estimates suggest OMCs were collectively losing nearly Rs 1,600 crore every day during the peak of the crude rally. The government eventually allowed gradual increases, but the pace of hikes has still lagged behind the rise in international oil prices.
There is, however, one factor offering some relief.
Global crude prices have cooled nearly 5 percent on monday amid hopes of a possible Iran-US understanding. Markets are betting that easing geopolitical tensions could stabilise oil supply routes and reduce fears around disruptions in the Strait of Hormuz — one of the world’s most critical oil transit chokepoints.
If crude prices remain soft, the pressure on Indian fuel prices may ease as well.
But analysts caution that even if a diplomatic settlement emerges, supply chains and shipping routes will take time to normalise. Insurance premiums, freight costs and geopolitical risk pricing may continue to keep crude elevated in the near term.
This leaves policymakers balancing two difficult priorities.
On one side is inflation and household distress. Higher fuel prices raise transportation costs and eventually feed into the prices of food, consumer goods and services. On the other side are the finances of state-run OMCs, which cannot indefinitely absorb losses without affecting investment plans, balance sheets and future supply stability.
For now, consumers may have received only temporary relief from larger price shocks. Because despite the Rs 7.38 per litre increase, the math for oil companies still does not fully add up. ( PTI )
