“Unless retail fuel prices change, there is no direct impact of higher oil prices on Consumer Price Index. However, there will be some marginal impact in the form of higher input costs,” said Aditi Nayar, chief economist, Icra.
Other economists also agreed.
“We don’t see a risk to inflation from rising crude oil prices as domestic petrol and diesel prices have not increased since May 2022. There could be marginal upward pressure on core inflation if companies pass on higher input cost pressures to consumers,” said Gaura Sengupta, economist, IDFC First Bank.
Sengupta expects WPI to stay subdued at 0.3% in FY24 but said company profits may suffer due to higher input cost pressures.
“The indirect spillover via input costs could be felt if the oil price rise sustains,” said Dipti Deshpande, principal economist, Crisil Ltd.”Rising oil prices can constrain further downside to non-food inflation,” said Deshpande.
The Reserve Bank of India, in its State of the Economy report, noted that stabilising core inflation was a sign of broad-based easing of prices.
But higher oil prices for longer periods could disturb inflation calculations.
Ind-Ra, which revised its Indian oil basket cost to $94.5 per barrel, expects wholesale inflation to be nearly a percentage point higher for the second half of the year compared with its earlier forecasts. The ratings agency pegged retail inflation to be 20-40 bps higher for the remaining two quarters.
“If the average cost of Indian oil basket increases to $94.5/bbl during H2FY24, then average retail inflation for FY24 would increase to 5.7% under full pass through and to 5.6% under a scenario where there is 50% pass through,” Ind-Ra’s note indicated. The agency was earlier predicting inflation at 5.5%. The price of the Indian crude basket rose to $97.03 per barrel on September 28, compared to $83.8 per barrel at the start of the fiscal.
Experts believe that the government has the fiscal space to absorb the high prices.
“While the increase in oil prices towards $100/bbl warrants monitoring, we doubt there is reason to be alarmist just yet,” said Shreya Sodhani, regional economist, Barclays.
“We doubt the government will immediately allow higher crude prices to pass through to retail prices, especially as it did not allow a reduction in prices while Brent was in the $70s range,” Sodhani said.
Rajani Sinha, chief economist, CareEdge, contends that oil marketing companies will likely absorb the hike.
“As CPI inflation stays higher due to elevated food inflation, there would be pressure on oil marketing companies (OMCs) not to hike retail petrol/diesel prices. As we approach the pre-election period, we anticipate that OMCs will absorb a significant portion of the elevated global crude prices,” Sinha said.
