The Indian government on Friday raised fuel prices in the country, aiming to ease the financial burden on oil marketing companies (OMCs) as global crude oil prices surged beyond $100 per barrel while retail prices had remained unchanged. With petrol and diesel now costing Rs 3 more per litre, the key question is: to what extent will this price hike provide relief?
While the outlook may appear slightly optimistic at first glance, the issue is no longer limited to crude oil prices. A falling rupee has also entered the equation, and the main concern is what happens when a weakening currency and rising fuel costs converge. Even a small change in the exchange rate can erase the gains from recent policy measures.
Rupee Depreciation Threatens to Neutralize Price Hike Benefits
According to SBI Research's Ecowrap report, the rupee is now at a level where further depreciation could completely neutralize the benefit of the recent Rs 3 per litre hike in petrol and diesel prices. The report highlighted that even an additional depreciation of Rs 2 in the rupee raises the effective crude oil price, pushing up the landed import cost and fully offsetting the gains from the current fuel price hike.
The report added that the recent fuel price increase was introduced primarily to ease the financial strain on OMCs, which continue to suffer from high crude oil costs while retail fuel prices have remained unchanged. According to the report, OMCs' under-recoveries on sales of petrol and diesel are soaring because of unchanged retail prices. These companies are incurring losses to the tune of Rs 1,000 crore per day, which amounts to around Rs 3.6 lakh crore annually.
Relief Only Partial for OMCs
According to SBI, the Rs 3 per litre revision in fuel prices would provide relief worth about Rs 52,700 crore to OMCs, but this would cover only around 15% of their projected FY27 losses. The report also emphasized the sensitivity of this relief to currency movements, noting that the rupee has already approached a critical depreciation threshold, beyond which further currency weakness could substantially erode the intended benefits of domestic fuel price revisions.
Consider the math: assuming an FY27 exchange rate of Rs 94 per US dollar and crude oil at $106 per barrel, SBI Research estimated the landed crude cost at nearly Rs 9,964 per barrel. The Rs 3 per litre hike gives OMCs a benefit of about Rs 477 per barrel, but even a Rs 2 fall in the rupee would push up import costs and wipe out much of this gain.
Call for Broader Macroeconomic Preparedness
SBI called for broader macroeconomic preparedness, stating that there is a need for a comprehensive policy on balance of payments. On global oil markets, SBI Research pointed to continued volatility, citing disruptions in the Strait of Hormuz linked to the ongoing Middle East crisis. According to the latest IEA report, crude will continue to remain under pressure owing to depleting inventories. The report further noted that shipments through the Strait of Hormuz have declined sharply in recent months, affecting both crude oil and LNG flows.
Inflation Impact
On inflation, the report estimated that the fuel price revision may push Consumer Price Index (CPI) inflation higher by around 15–20 basis points during May–June 2026, while also revising its FY27 inflation projection to 4.7%.
