A recent report by Crisil has highlighted that the surge in petrol and diesel prices could reignite inflationary pressures in the Indian economy. The increase in fuel costs is expected to raise transportation, logistics, and manufacturing expenses, which will likely affect food and consumer goods categories in the coming months.
Fuel Price Hike and Its Direct Impact
Since May 15, petrol and diesel prices have risen by approximately Rs 7.5 per litre. If global crude oil prices remain elevated, further increases are possible. Crisil noted that oil marketing companies are gradually reducing their under-recoveries, and cumulative hikes could approach Rs 10 per litre in the near term. The report, quoted by PTI, stated that the broader effect will reverberate across the economy through higher transport costs, pushing up both food and core inflation.
According to the analysis, a Rs 7.5-per-litre increase in fuel prices could directly add around 36 basis points to the Consumer Price Index (CPI) inflation. If the cumulative rise reaches Rs 10 per litre, the impact could escalate to nearly 48 basis points.
Indirect Effects Through Supply Chains
Beyond the direct effect, Crisil warned that higher fuel prices could spread inflationary pressures through freight and logistics costs. Road transport accounts for about 71 per cent of India's freight movement, with fuel constituting nearly 42 per cent of operating expenses. The increase in retail fuel prices will directly impact these freight cost structures and feed into prices across supply chains in the coming months.
Food Categories Most Affected
Food categories that rely heavily on transportation networks—such as dairy products, tea, coffee, fruits, pulses, spices, eggs, meat, and fish—are expected to face the greatest impact. Crisil also noted that the fading of a favourable base effect could further accelerate food inflation in the coming quarters.
Core Inflation Risks
The report flagged risks to core inflation as manufacturers grapple with higher costs for crude oil, petroleum products, and natural gas, along with rising transportation expenses. Sectors like clothing, consumer electronics, wood products, and construction materials—including cement and ceramics—are among the most transport-intensive industries and could see stronger cost pass-through to consumers. Manufacturers of chemicals, coal, and metal-related products may also face higher input costs. With demand conditions remaining relatively stable, companies may increasingly pass on these costs or resort to shrinkflation strategies to protect margins.
Mitigating Factors
Crisil noted that some of the inflationary impact could be cushioned by GST rate cuts announced in September 2025 on several mass-consumption categories, including electronics, automobiles, clothing, processed foods, and fast-moving consumer goods. However, the report stated that the tax reductions are unlikely to fully offset the impact of persistently high energy prices.
Crude Oil Price Outlook
Crude oil prices have averaged around USD 112 per barrel during the first two months of the current financial year, significantly higher than Crisil's base-case assumption of about USD 95 per barrel for the full year.
RBI's Stance
While headline inflation remains below the Reserve Bank of India's 4 per cent target, Crisil expects inflation to trend higher, though it is likely to remain within the RBI's 2-6 per cent tolerance band. The report suggested that the RBI may initially look through the supply-side impact of higher fuel prices but will closely monitor household inflation expectations and the risk of rising transportation and input costs triggering broader price pressures. The central bank is also expected to keep a close watch on weather-related risks, including forecasts of a below-normal monsoon and evolving El Niño conditions, which could further complicate the food inflation outlook.
