Rising petrol and diesel prices could impact inflation and current account deficit, say analysts

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Published: April 3, 2018 4:55:57 PM

With petrol prices at near 5-year high, and diesel prices at all-time high levels, after oil marketing companies hiked prices yesterday, analysts point out that the rising petrol and crude oil prices could have a negative impact on the already precarious current account deficit and inflation.

Petrol prices zoom to a near 5-year high in Delhi. Diesel prices at all-time high.According to a note by Angel Broking, domestic oil prices are impacted by three key factors: global crude prices, exchange rate and domestic taxes. (Image: Reuters)

With petrol prices at near 5-year high, and diesel prices at all-time high levels, after oil marketing companies hiked prices yesterday, analysts point out that the rising petrol and crude oil prices could have a negative impact on the already precarious current account deficit and inflation. According to India Economic Survey 2018, every $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points.

Notably, the petrol continued their up move on Tuesday, touching a near five year high of Rs 73.95 per litre in Delhi. The previous high in Delhi was recorded at Rs 74.10 a litre in way back in September-13. According to a note by Angel Broking, domestic oil prices are impacted by three key factors: global crude prices, exchange rate and domestic taxes. “Brent crude has crossed $70/bbl and that is putting pressure on domestic prices,” Jaikishan J Parmar of Angel Broking said adding that between Nov 2014 and Jan 2016 the Finance minister had raised the excise duty on 9 occasions to slice part of the lower crude prices.

According to the analyst the move could have macro implications for India including widening of the current account deficit. Notably, the CAD has already touched 2% of GDP for October- December quarter and it could get worse in the March quarter, says the firm.

With RBI monetary policy committee meeting round the corner, the consensus opinion seems to be that the apex bank will keep policy rates unchanged on the back of rising global crude oil prices and also to tame inflation. “We expect the RBI MPC to strike a balanced tone on April 5, with March quarter inflation set to average 4.6 per cent, 0.50 per cent below their 5.1 per cent forecast,” Fitch said in its report.

According to Angel Broking, the more immediate impact of a hike in prices could be on CPI inflation which could go back above the 5% mark. “In fact markets are already worried that higher crude could compel downstream oilcos to bear part of the subsidy burden,” the firm noted.

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