Can consumers expect relief from further fuel price hike?

Petrol and diesel prices have been hiked by Rs 10 a litre each since March 21. And India’s retail inflation accelerated to 6.95% in March, its highest in 17 months. It is above the upper limit of the Reserve Bank of India’s tolerance band for a third straight month.

Meanwhile, there seems to be no immediate end to the war. Russian President Vladimir Putin has said that peace talks with Ukraine have hit a dead end. The war has disrupted supply chain and considerably raised commodity prices. 

After a lull during the assembly polls, the prices of fuels have again started increasing. Consumers have been demanding relief for long. The government, on the other hand, is not relenting. It has not slashed excise duty despite wide expectations that it would provide consumers some cushion from the sharp rise in retail prices.

Meanwhile, Chief Economic Advisor V Anantha Nagewaran recently said that if crude oil persistently stays above $110 a barrel, then the government, oil marketing companies and consumers will have to share the burden. 

The benchmark Brent crude is currently trading at $106 per barrel, down from a recent high of $128. And the probability of oil persistently staying above $110 a barrel is also low. Analysts expect it to average at around $100 this year.

The Centre had last slashed excise duty on fuel in early November last year by Rs 5 a litre on petrol and Rs 10 on diesel. Gains from that move have been wiped out now.  

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Things are expected to get worse in the near term as the full effect of the spike in crude oil and global energy prices following Russia's invasion of Ukraine will be seen this month as the pass-through to consumers at fuel pumps was delayed.

In its latest policy review last week, the RBI opted to leave the repo rate unchanged at a record low of 4.0% even as inflation shows no signs of abating any time soon. It wants to help revive the pandemic hit economy.

Economists believe that the higher-than-expected retail inflation may trigger a rate hike cycle from June. 

Seasonality effect and elevated global food prices, especially edible oils and cereals will keep food inflation high in the summer months. But there are expectations that inflation will moderate from the third quarter.

So the government may not be very keen on reducing the excise duty significantly. It may choose to wait. The government will also be wary of pushing up bond yields further if it chooses to increase borrowings to make up for any excise duty reduction.

However, we cannot rule out the possibility of the government partially absorbing further increase in fuel prices to offer a small reprieve in inflation and boost consumer sentiment.