“Given the weightage of petrol and diesel in the CPI (Consumer Price Index) basket, a 3-5% increase likely adds 15-25 bps to the headline inflation, besides second round impact,” said Radhika Rao, senior economist and executive director at DBS Bank.
Retail fuel prices could directly add 15 basis points to inflation, while higher transportation, logistics and agricultural input costs may create additional indirect pressures of 10-15 basis points, according to Rajani Sinha, chief economist at CareEdge Ratings.
Petrol and diesel together account for 4.8% of the CPI basket.
State-run oil marketing companies on Friday raised petrol and diesel prices by ₹ 3 per litre, the first increase in four years, amid a sharp rise in global crude oil prices due to the West Asia conflict. This comes days after the government increased the import duty on gold and silver to discourage imports, reduce the strain on foreign exchange reserves and support the rupee.
Milk prices were also raised by ₹2 per litre earlier this week. “Since the hike was effected mid-month, this impact will be spread over the May and June inflation prints,” said Aditi Nayar, chief economist at ICRA. Aastha Gudwani, India chief economist at Barclays, said the increase in import duty on gold and fuel prices, once fully reflected in June inflation, are expected to add 10 basis points and 15 basis points, respectively, to headline inflation. Petrol prices rose marginally by 0.07% in April, while diesel remained unchanged.
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“The actual impact on CPI inflation is likely to be higher given the fuel price increase will affect the price of compressed natural gas, transportation, freight, ecommerce industry and diesel users including coastal fishing and aqua farmers, among others,” said Megha Arora, director at India Ratings and Research (Ind-Ra). Brent crude has surged to more than $100 a barrel from $73 since the West Asia conflict began on February 28. India imports more than 85% of its crude oil requirements, with about half passing through the Strait of Hormuz, which is now mostly blocked.
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ICRA estimates the May inflation to be 4.3%, up from 4.1% projected earlier, while Ind-Ra projects 3.8% and IDFC First Bank estimates 3.9%, assuming no further fuel price revisions. Retail inflation accelerated to 3.5% in April from 3.4% in March. The Reserve Bank of India maintains an inflation target of 4% with a tolerance band of 2% on both sides. “The combined effect of petrol, diesel and milk price is likely to increase inflation by around 42 bps,” said Arora, adding that the impact in May could be around 20 bps.
Bank of Baroda chief economist Madan Sabnavis said the full impact will be visible in three-four months before it percolates through the secondary and tertiary channels.