The Indian rupee plunged to a new all-time low of 96.14 against the US dollar intraday on May 15, raising concerns that recent fuel price increases may fail to provide the intended relief for oil marketing companies (OMCs). While petrol and diesel prices were hiked by ₹3 per litre, an analysis by the State Bank of India's (SBI) economic research department suggests that continued currency depreciation could entirely nullify these gains.
Fuel Price Hike Offers Temporary Relief
The government's decision to raise fuel prices by ₹3 per litre was aimed at mitigating the substantial under-recoveries faced by OMCs due to surging crude oil prices. According to SBI estimates, this price increase is expected to provide a relief of ₹52,700 crore in OMCs' under-recoveries, accounting for approximately 15 percent of their projected total losses for the financial year ending March 2027.
The report calculated that assuming an average FY27 exchange rate of ₹94 per dollar and an Indian crude oil basket price of $106 per barrel, the current landed crude cost is nearly ₹9,964 per barrel. The ₹3 per litre hike translates to an estimated benefit of around ₹477 per barrel for OMCs.
Rupee's Weakness Erodes Benefits
However, the rupee's persistent decline poses a significant challenge. A weaker rupee directly increases the dollar price of imported crude oil, which is a major cost for Indian OMCs. SBI's research highlights that even an additional depreciation of just ₹2 in the rupee could raise the effective crude oil price enough to fully offset the gains derived from the recent fuel price hike.
The SBI report stated, "The rupee has already moved beyond a critical depreciation threshold, beyond which more currency weakness may substantially erode the intended benefits of fuel price revisions."
Impact on Inflation and Demand
Beyond the OMCs, the fuel price hike is also expected to have a ripple effect on the broader economy. The SBI report forecasts a 15-20 basis points impact on the Consumer Price Index (CPI) inflation during May-June. Historically, such price increases have led to an immediate decline in fuel consumption, though demand typically recovers over time, showing no significant annual reduction.
Excise Duty Cut: A Double-Edged Sword?
The report also explored the implications of further rationalising excise duty on petrol and diesel, potentially reducing it to zero from the current 11.9 percent and 7.8 percent, respectively. While this could further reduce OMCs' losses, it would come at a significant cost to government revenue, estimated at ₹1.9 lakh crore. Such a move could also lead to a 0.5 percent increase in the fiscal deficit relative to GDP, unless accompanied by expenditure cuts.