The Reserve Bank of India (RBI) may look past the immediate supply-side impact of higher oil prices in its upcoming monetary policy, but the escalating fuel costs are heightening the risk of broader inflationary pressures across the economy, according to a report by Crisil.
Fuel Price Hike and Inflation Impact
Retail petrol and diesel prices have increased by approximately Rs 7.5 per litre since May 15, and further hikes are anticipated if crude oil prices remain elevated. The report estimates that the direct upside to Consumer Price Index (CPI) inflation from a Rs 7.5 per litre increase in petrol and diesel prices is around 36 basis points (bps). This figure could rise to 48 bps if retail fuel prices increase by Rs 10 per litre.
While CPI inflation currently remains below the RBI's 4% target, Crisil noted that it is projected to move upward but is not expected to cross the upper limit of the 6% tolerance band.
Broader Economic Implications
The report highlights that as oil marketing companies gradually reduce their losses (or under-recoveries), cumulative hikes could approach Rs 10 per litre in the near term. The broader effect will reverberate through the economy via higher transport costs, pushing up both food and core inflation.
Crude prices have averaged around $112 per barrel in the first two months of the current fiscal year, with Crisil's base case expectation at $95 per barrel for the full fiscal year.
Transport is identified as a major channel through which fuel inflation spreads across the economy. While freight transport accounts for 54% of India's logistics cost, road transport represents nearly 71% of total freight movement. The increase in retail fuel prices will directly impact these freight cost structures and feed into prices across supply chains in the coming months.
RBI's Stance and Monitoring
Crisil expects the RBI's Monetary Policy Committee (MPC) to look through these supply-side impacts on CPI inflation. However, the central bank is likely to remain watchful of spillover risks to household inflation expectations and the possibility of second-round effects leading to generalized price pressures.
Additionally, the implications of an expected below-normal monsoon and evolving El Nino conditions on food inflation will also be monitored.
This report underscores the delicate balance the RBI must maintain between supporting economic growth and containing inflationary pressures amid rising fuel costs.
