The rupee depreciated to a record low on Friday, crossing the 96 mark. Experts warn that rupee depreciation in FY27 could effectively erode the intended benefits of the recent domestic fuel price hike.
According to an SBI Research report, even an additional depreciation of Rs 2 in the rupee, from the FY27 current average at Rs 94, raises the effective crude oil price, pushing the landed import cost, which fully offsets the gains from the current fuel price hike.
“We calculate the threshold level of rupee depreciation beyond which the gains accruing to OMCs from the recent ₹3 per litre fuel price increase are effectively neutralized by the rising cost of crude oil imports.” SBI Research noted.
OMCs to get relief
The crude price surge and a hold on retail prices had put Oil Marketing companies under heavy stress. Prior to the Rs 3 per litre hike on petrol and diesel, OMCs were incurring losses to the tune of Rs 1000 crore per day, which amounts to around Rs 3.6 lakh crore a year.
According to SBI Research, the current increase in oil price by Rs 3 is likely to provide relief of Rs 52,700 crore in OMCs under recoveries, which is 15% of the expected total loss of the OMCs in FY27.
Fiscal deficit to expand
According to SBI Research, the retail price hike is not likely to have much impact on oil consumption as historical data shows that a hike in petrol and diesel prices has been followed by a decline in consumption immediately after the hike, only to recover thereafter with no decline visible in the annual consumption levels.
However, the earlier reduction in excise duty on petrol and diesel will wilden centre’s fiscal deficit. The government had earlier reduced the excise duty by Rs 10 on diesel and petrol during the year to help the OMCs, for which the revenue loss for the centre is estimated as Rs 1.1 lakh crore.
“In a similar way if we assume that the excise duty is further rationalized to zero to help OMCs reduce their losses, it would entail a revenue loss of Rs 1.9 lakh crore or 0.5% of the GDP for the Government. The states will also lose Rs 80,000 crore,” SBI Research said.
Crude oil projections
The Brent Crude has been under pressure, hovering around $107/bbl. Global oil supply declined by a further 1.8 mb/d in April to 95.1 mb/d, taking total losses since February to 12.8 mb/d. As per the latest IEA report, crude will continue to remain under pressure owing to the depleting inventories.