MUMBAI: India’s petrol and diesel price hike, alongside a volatile crude oil outlook, is set to ripple across key sectors and is already feeding early market pressure, with analysts warning of further inflation if global oil prices climb.
Oil marketing companies (OMCs) finally bit the bullet and raised prices of petrol and diesel by around ₹3 a litre on Friday amid elevated global prices. More hikes are expected going ahead as under-recoveries remain high.
Higher fuel prices are expected to feed quickly into logistics and freight costs, with transport operators unlikely to absorb higher diesel expenses, triggering cost pass-through across supply chains and sectors dependent on transportation and energy-intensive inputs, potentially widening inflation pressures across the economy, according to experts.
“We raise FY27 headline inflation to 5% versus 4.6% earlier assuming a ₹10 per litre hike in retail fuel prices, along with the impact of El Niño-led adverse monsoons,” said Madhavi Arora, chief economist at Emkay Global.
The cost pressures come at a time when corporate earnings in consumption- and transport-linked sectors are already under strain from elevated input costs and uneven demand recovery.
Sectoral pressure
Fast-moving consumer goods (FMCG) companies are expected to face higher distribution and input costs, even as they continue to grapple with already elevated raw material inflation.
Large FMCG players have already begun raising prices as fuel, packaging and food commodity costs continue to rise. Higher prices of edible oils, milk, wheat and crude-linked packaging materials have added pressure on margins, with companies warning that prolonged inflation could slow demand recovery in the coming quarters.
“While FMCG companies may attempt to pass on the increase to consumers, low-ticket consumption products are highly price-sensitive and hence companies will not fully pass on the increased costs there,” said Aniruddha Sarkar, co-founder at Equinova Investment Managers Pvt. Ltd, a Portfolio Management Services company. “This will make full cost transfer difficult and potentially hurt margins.”
The Nifty FMCG index is down fallen 0.8% since Friday, compared with a nearly 0.9% fall in the Nifty 50.
Airlines are expected to be among the most affected sectors as aviation turbine fuel (ATF) costs rise in line with crude prices. Higher fuel costs could also lead to fare increases, potentially weighing on demand.
“Along with ATF, expensive airfares could dampen travel demand, especially on international routes, creating a double impact on both revenues and profitability,” said Vinit Bolinjkar, head of equity research at Ventura.
Shares of IndiGo and SpiceJet have fallen 1.2% and 3.4%, respectively, since Friday.
Rising crude prices are also expected to push up costs of petroleum-linked inputs such as polymers, rubber, and fertilizers, affecting manufacturing margins across industries.
In the auto sector, higher fuel prices are likely to weigh on demand in price-sensitive segments while also increasing input costs for manufacturers.
Higher petrol and diesel prices increase vehicle ownership costs, particularly impacting entry-level two-wheelers and small cars, said Bolinjkar. At the same time, elevated crude prices are also pushing up commodity and raw material costs, which could force automakers to raise vehicle prices further.
The Nifty auto index is down 1.5% since Friday.
If oil were to average $100 or more for the current fiscal, the earnings growth estimate of 19% will take a hit but it's difficult to put a finger on the extent of decline, Sanjeev Prasad, managing director and co-head, Kotak Institutional Equities had earlier told Mint.
"The impact on earnings will depend on the duration of the war and the duration of the war depends on the economic will and the political will of the two parties—Iran and the US," Prasad added.
The agriculture sector is also expected to face rising costs from diesel-powered irrigation and transportation of produce ahead of the kharif sowing season, potentially adding pressure on food inflation in coming months.
The sector accounts for nearly two-fifths of India’s annual diesel consumption of around 92 million tonnes. Diesel powers tractors, harvesters, irrigation pumps and transport vehicles used extensively in rural India, making fuel prices a key determinant of farm input costs.
“Majority of the farmers still use diesel-powered irrigation pumps leading to higher operational costs, while higher transport costs of finished produce to the markets will add another level of higher costs for end consumers,” Sarkar said.
Brent crude has jumped about 50% since the start of the war, according to a Bloomberg report, and traded at $111.56 a barrel in early deals on Monday after a drone attack near a nuclear power plant in the United Arab Emirates heightened fears of fresh hostilities in West Asia.
Analysts caution that the current fuel price adjustment may prove insufficient if crude oil continues its upward trajectory.
“If crude prices do not weaken, and if they break out the psychological barrier of $117, then crude could move towards $135-$140,” said Bolinjkar. “In that case, the current petrol and diesel price hike will be insufficient, and fuel prices will have to be raised further.”