NEW DELHI: Tuesday’s fall in Brent crude to under $80 a barrel for the first time in three months is expected to allow oil companies to maintain current pump prices, while aiding government finances and curbing inflation, provided the gains in crude markets hold.
Policymakers remain cautious in their projections, given the evolving peace talks between the US and Iran. However, markets appear more optimistic, with oil marketing companies’ stocks rallying over the past two days amid softening global prices.
“It seems to be a relief rally, but whether prices can be sustained will depend on demand and supply. Oil marketing companies are still incurring losses, and the government has provided substantial relief through excise cuts. If oil prices decline and stay lower for some time, the benefits of softening prices can be passed on to consumers,” said DK Joshi, chief economist at Crisil.
While Brent had dropped to $83 a barrel on Monday, the cost for Indian refiners was estimated at $82.84, indicating a narrowing gap. However, consumer costs are not directly tied to crude prices but to international petrol and diesel prices, which were 22% and 43% higher in June, respectively.
“The recent de-escalation in the conflict and moderation in oil prices bodes well for both inflation and growth outlook for India. With every $10 increase in oil, inflation tends to rise by 20-30 basis points and growth drag is 20 basis points. While the impact of disruptions may linger for some time, the eventual move of oil prices towards $70 per barrel over the coming months could help stabilize the rupee and reduce rising fiscal pressures due to higher subsidy costs for the government,” said Sakshi Gupta, principal economist at HDFC Bank.
The easing of tensions and lower oil and fertilizer prices are expected to offer significant relief to the government, which faces a massive spike in subsidy bills. The Centre is under pressure to double support for soil nutrients and bear losses on subsidized gas cylinders. With oil marketing companies losing around Rs 700 crore daily on fuel and cooking gas, their direct tax contribution will be zero.
“The fertilizer subsidy will overshoot but not double as was suggested. The LPG subsidy will increase, but there will be no fresh price hikes by oil companies, provided the peace deal works out. We expect the fiscal deficit to be higher than what was budgeted,” said Madan Sabnavis, chief economist at Bank of Baroda.
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