India's first fuel price hike in four years may do little to cover refiners' losses

India's decision to raise fuel prices by a modest amount for the first time in four years is unlikely to dent domestic demand for gasoline and diesel, but refiners could come under pressure to increase pump prices further if global crude oil prices remain elevated in the foreseeable future, analysts and refining sources said May 18.

The move by state-run refiners to raise retail gasoline and diesel prices by Indian Rupees 3/liter is likely to do little to help them recover a substantial portion of the under-recoveries they have incurred since the start of the conflict in the Middle East. However, it highlights the government's efforts to keep inflationary pressures in check for now, they added.

"The retail price hike is very small relative to the crude price surge since the Middle East conflict started. This is unlikely to make any dent in oil products demand," said Premasish Das, executive director for oil analytics at S&P Global Energy CERA.

"Because of some of the recent changes to excise duties, some of the price shock will be absorbed by the government instead of getting passed on to the consumer. The real drop in demand will come only if the government and companies implement partial working from home," he added.

Indian state refiners on May 15 raised gasoline and diesel prices by Rupees 3/liter -- about 3%-3.5% -- with immediate effect, senior officials at Indian Oil Corp. and Hindustan Petroleum Corp. Ltd. said, as energy companies look to recover some of the losses from surging global crude prices.

The extent of the increase varies across states due to provincial taxes. State refiners last increased retail gasoline and diesel prices in April 2022.

"Indian refiners have benefited in the past when crude oil prices were low. So, now they can absorb some of the losses in the interest of the consumers and keep fuel at affordable levels," a government source said.

On May 19, state refiners raised gasoline and diesel prices by another 90 paise/liter, an IOC official said, marking the second increase in less than a week.

Limited options

Crude oil prices remain more than 45% above levels seen before the start of the Middle East conflict.

Crude oil futures fell over $2/barrel but stayed elevated in after-market trading May 18 after US President Donald Trump said he would postpone a planned attack on Iran originally scheduled for May 19. At 1928 GMT, NYMEX June crude was trading $1.26/b higher at $108.66/b, while ICE July Brent rose 67 cents/b to $109.93/b.

Analysts said India could raise retail fuel prices again if the situation in the Middle East does not normalize and global crude oil prices remain elevated for an extended period.

"Persistently high global crude oil prices make pass-through to domestic cooking and transportation fuel prices an imperative. The government has raised the cost of petrol and diesel. A depreciating rupee also adds to the cost of imported inputs," said Dharmakirti Joshi, chief economist at CRISIL, part of S&P Global.

Petroleum Minister Hardeep Singh Puri said May 10 that oil marketing companies were importing crude oil, gas and LPG at higher costs but selling final products in the retail market at relatively lower prices to shield consumers, resulting in mounting losses of Rupees 10 billion per day ($105 million).

Economists Sonal Varma and Aurodeep Nandi of Nomura said in a research note May 15 that the recent increase in gasoline and diesel prices would cover only about one-tenth of the under-recoveries faced by refiners.

"The inflation impact is modest for now, but risks are building. Since the war in Iran began, oil marketing companies have been hiking prices of other forms of energy, like commercial LPG cylinders and industrial diesel, but with the hikes expanding to petrol and diesel, we are witnessing the limits of the fiscal defense to Iran war shocks," they said.

"Consequently, in recent weeks, there has been a regular drumbeat of measures announced by the government to ensure that households gradually share some of the burden," they added.

Structural reforms

Researchers Sanjeev Gupta and Pratik Tiwary of the Indian Council for Research on International Economic Relations said in a recent research note that India has so far shielded consumers and producers from higher international fuel prices following the start of the Middle East conflict.

While this approach has provided short-term relief, it has shifted the burden onto the budget, weakened price signals and increased macroeconomic vulnerabilities, particularly through pressure on fiscal and external balances.

"Looking ahead, a gradual and well-communicated move toward greater pass-through of international prices, combined with targeted support for vulnerable households, particularly those reliant on LPG, would help reduce fiscal risks while preserving social protection," they added.

The current crisis further underscores the need to accelerate structural reforms to reduce dependence on imported oil, expand petroleum reserves and diversify energy sources.

"Without such reforms, India will remain highly exposed to future energy shocks, with rising fiscal and external risks," the ICRIER research note said.