How rising fuel prices shape markets, economy

Retail petrol and diesel prices have touched record highs over the past few days. On March 3, petrol price for a litre was unchanged for the fourth day in a row at Rs 97.57 in Mumbai, Rs 91.17 in Delhi, Rs 93.11 in Chennai and Rs 91.35 in Kolkata. Diesel prices too have been left untouched at Rs 81.47 in Delhi, Rs 88.60 in Mumbai, Rs 86.45 in Chennai and Rs 84.35 in Kolkata. There are reports of petrol touching and even exceeding the Rs 100-mark in several other parts of India.

The rates are revised on the basis of changes in international prices and exchange rate of the rupee on a daily basis. Prices have been rising ever since January, with crude oil trading at $65.69 (a little over Rs 4800 per barrel) in the international market on March 3, while WTI (West Texas Intermediate) is trading at $62.7 per barrel. Meanwhile, the rupee settled at Rs 73.37 against the dollar on March 2, according to provisional data.

Why have prices risen?

The factors that have led to rising fuel prices include a rise in international crude oil prices owing to cuts in production by leading oil-producing countries. Also, a leading cause of rising petrol and diesel prices in India can be attributed to taxes. Nearly 60 per cent of petrol price and 54 per cent of diesel price in India account for taxes, including state and central.

Brent crude had crashed to $19 per barrel in April 2020, following the pandemic-related lockdowns, plummeting over 70 per cent from the beginning of 2020. In spite of this crash, the retail fuel prices did not drop in line in India, as the government increased taxes to ensure that revenues could gain. This has meant that the excise duties from petrol and diesel for the current fiscal will stand at an estimated Rs 3.46 lakh crore (revised estimate), a nearly 40 per cent increase from the FY21 budget estimate of Rs 2.49 lakh crore. In fiscal 2020, the central government had collected nearly Rs 2.23 lakh crore in excise duty on petroleum products.

Though crude prices started picking up ever since the opening up of the global economies, taxes haven’t come down, leading to a rise in retail fuel prices.

One of the impacts of rising fuel prices is the impact on the fiscal deficit. India is the third-largest importer and consumer of oil, globally. According to an RBI report, every $10 per barrel rise in crude prices will lead to an extra $12.5 billion deficit or nearly 43 bps of the GDP.

Fear of inflation

At a time when the third-quarter GDP data shows that India is out of a technical recession and the GDP growth has entered positive territory with a 0.4 per cent growth, rising petrol and diesel prices could dampen the economy by leading to inflation

Rising fuel prices will impact the consumer price index (CPI). The retail inflation eased to 4.06 per cent in January from 4.59 in December on the back of low vegetable prices but a steady increase in fuel prices may put the inflation percentage up yet again.

Brokerage BofA (Bank of America Securities) analysts have noted that a 10 per cent rise in oil prices can increase retail inflation by 0.23 per cent, which will hit consumption hard. In a note, they said an oil tax cut is expected to “soften retail prices” and added that this can be funded by the Reserve Bank of India’s Open Market Operations (OMOs).

Meanwhile, India has urged the Organisation of Exporting Petroleum Countries (OPEC) and its partners (OPEC+) to let go of “artificial cuts” that push oil prices up. There is also talk of the Finance Ministry beginning consultations with oil companies, oil ministry and states to find a way to reduce taxes on consumers.

Stock market and inflation

Rising retail fuel prices lead to negative pressure on profits, which may impact the stock market. Inflationary tendencies can impact purchasing power and therefore consumer-driven stocks will be impacted. With rising inflation, there is also the eventuality of investors moving to bond markets and letting go of equities.

The RBI is mandated to keep inflation within a 2 per cent range of 4 per cent. The central bank’s target is apt for the next five years as part of its flexible inflation targeting (FIT) mandate, according to a recent  RBI report. The RBI has its role cut out as it attempts to stem spiralling bond yields and inflation.

Conclusion

The stock markets have currently seen some corrections of late but the accommodative stance of the RBI and sustained foreign portfolio investment interest have ensured that the markets haven’t been impacted too much over a sustained period. In its latest assessment on the state of the economy for February, the RBI has noted that 96 per cent of pre-pandemic economic activity has been restored. This should serve as more than a silver lining for both the economy and the markets.