NEW DELHI: India on Monday was greeted with a sight that has become all too common again: fuel
prices breaking an all-time high. Both petrol and diesel rates at pumps across the country continued their steady record-breaking climb upwards, with the former selling at Rs 79.15 a litre and latter hitting Rs 71.15 in the national capital.
Experts say the trend is being driven by geopolitics that has dealt the Indian economy a double whammy. The looming imposition of US sanctions on Iran in November is pushing crude oil rates up, while the weakening rupee is making it even costlier for Indian consumers.
While the rupee dropped to another all-time low of 71.21 a dollar on Monday, recent statements from government officials indicate the over-valued currency may be left to find its own equilibrium, without much intervention from RBI.
To make matters worse, fallout from the sanctions and what global oil producers decide could set crude prices afire. Brent crude was already trading at around $78 per barrel on the spot markets on
Monday evening, levels last seen in early July.
According to Gaurav Moda, India energy head at Accenture, while there could be sharp fluctuations over the next two months, crude at a sustained $80 per barrel or above is a strong possibility if
ongoing negotiations do not result in an adequate production increase by November.
This will mean even higher fuel rates unless the states or the centre cut taxes. “While no oil producer is saying no to supply increases, reaching a decision is taking time,” said Moda, adding however
that a solution is likely to be agreed to close to the deadline.
A larger concern is the impact a sustained upward trend will have on inflation and growth. While fuel as such does not have a large weightage in the Consumer Price Index, second-degree impact through
rising transport costs on consumables like food could raise the spectre of more interest rate hikes from the inflation-targeting central bank.
“It is a concern, because it is going to be seriously inflationary. In the first round diesel is expensive, then transportation goes up which adds to the cost of other goods,” said Madan Sabnavis, chief economist, Care Ratings.
D K Doshi, chief economist, Crisil was more circumspect. “I would say higher fuel rates are a risk, but not on its own... unless other factors like food inflation start perking up,” he pointed out, “but if you see earlier trends, you will see that while crude prices had started rising over the last two years, inflation came in at just 3.6 per cent in 2017”.
If the drops in crude prices are as sharp as the spikes, the volatility could also be a saving grace over the next two months. With Indian retail fuel prices linked to rolling averages of international benchmark prices, the spikes could be cancelled out by falls in crude rates, leading to lower average rates.
“CPI inflation could definitely near the RBI’s upper inflation target of 6 per cent if this trend sustains. But, this is a big if,” Doshi added.
“The rupee has also tended to generally bounce back.”
In a worst case scenario however, with geopolitical factors controlling crude prices, and the rupee to a lesser extent, a duty cut could be the only option to ease fuel inflation, either from the states or the Centre. "This would be the only way," Sabnavis said.
He also added that the only beneficial effect from increasing fuel rates was increased government revenues. "Because fuel doesn't come under GST, state governments will see increased collections from
Value Added Tax (VAT) which are levied as a percentage. The central excise is a fixed rate, so unless demand falls, that will hold steady too," he concluded.
RBI buys gold for 1st time in a decade
In a bid to soften the blow of rupee depreciation, the Reserve Bank of India bought as much as 8.46 tonnes of gold in 2017-18. This is also the first gold purchase by the apex bank in a decade. According to the RBI’s latest annual report, the central bank held 566.23 tonnes of gold as on June 30, 2018, compared with 557.77 tonnes a year ago. The last time the RBI purchased gold was in November 2009, when it bought 200 tonnes of the precious metal from the International Monetary Fund
Tehran to ship oil in its own vessels to India, China
In a bid to defy US sanctions, India is reportedly looking at importing Iranian oil using tankers and insurance arranged by Tehran. The move comes after firms including the country’s top shipper Shipping Corp of India halted voyages to Iran in view of US sanctions. China has already shifted oil imports to vessels owned by National Iranian Tanker Co
Iranian rial hits all-time low
The Iranian rial hit a record low of 128,000 against the dollar on Monday amid a deterioration in the economic situation