A Rs 3 hike makes India's inflation battle somewhat harder
Indian Oil Marketing Companies (OMCs) have finally hiked petrol and diesel prices by Rs 3 per litre each after reportedly bleeding Rs 1,000-1,200 crore in losses every day since the Iran war began. The fuel rate hike comes two-and-a-half months after the US and Israel launched joint strikes on Iran, initiating a long-standing war that has shifted geopolitics, disrupted supply chains and caused price hikes across global economies.
Alongside petrol and diesel, the price of Compressed Natural Gas (CNG) has also been hiked by Rs 2/kg, raising the gas bill to Rs 84 per kg in Mumbai and Rs 79.09 per kg in Delhi.
Also read: Petrol Price Hike: The crude shock logic that will make Indians pay a higher price
The decision is expected to add fresh inflationary pressure to the Indian economy, with economists warning that higher fuel costs could gradually make transportation, logistics and retail goods more expensive in the coming months.
Since the Gulf conflict began, oil and natural gas have been among the most impacted commodities with disturbances in the Strait of Hormuz, a key waterway near Iran that accounted for 34% of the world’s seaborne crude oil trade, with China and India receiving 44% of the share.
Calling the price hike a “long-anticipated move”, Radhika Rao, Senior Economist and Executive Director, DBS Bank, said that higher pump prices are likely to moderate demand and consequently the import burden.
Fuel prices and India’s inflation paradigm
Diesel remains the backbone of India’s transport economy, powering trucks, buses, agricultural equipment and industrial logistics networks. A slight rise in fuel prices can have a rippling effect across industries and supply chains, eventually raising the cost-of-living in the country.
The Gulf war has already cast its shadow on India’s inflation statistics with retail inflation inching up to 3.48% in April, as compared to 3.4% in March.
The West Asia crisis has changed the inflation dynamics dramatically, with April Wholesale Price Index (WPI) inflation also printing to 8.3% from 3.86% in March, driven by higher crude prices and higher core prices.
While fuel availability remains stable, the hike is likely to intensify inflationary pressures across the economy, Ajit Mishra, SVP, Research at Religare Broking Ltd., noted, adding that higher transportation and logistics costs could gradually push up prices of essential goods and services, increasing the burden on household budgets and raising overall cost-of-living concerns in the near term.
Also read: Fuel price hike may push up freight costs by 3%: Transport operators
Trucks, buses, rail freight, farm machinery and industrial logistics networks rely heavily on diesel, implying that any increase in fuel costs could raise the price of transporting vegetables, grains, milk, medicines, FMCG products and e-commerce deliveries.
The impact of higher diesel prices could become particularly visible in food inflation, an area where India remains highly sensitive due to the large dependence of agriculture and food distribution on fuel-driven logistics. Diesel powers a significant part of the rural economy, from tractors, harvesters and irrigation pumps to trucks transporting produce from mandis to urban consumption centres.
Any sustained increase in diesel costs raises input expenses across the agricultural supply chain, especially for perishable commodities such as vegetables, fruits and milk, where transportation speed and cold-chain logistics play a critical role.
Higher diesel prices may add another layer of pressure to food prices by increasing irrigation costs in water-stressed regions and making transportation more expensive during periods of supply tightness. Staples such as cereals and pulses could also face indirect cost pressures through higher freight and storage expenses. With food inflation carrying a significant weight in India’s consumer price index basket, economists warn that sustained fuel-led cost escalation may quickly spill over into broader household inflation.
Transport operators have already warned that the fuel price hike would increase the overall freight cost by around 3 per cent, and urged the government to ensure that traders cannot increase product prices disproportionately.
Also read: CNG Price Hike: Natural gas gets costlier by Rs 2 per kg after petrol, diesel rate shock
All India Transporters' Welfare Association joint secretary Sunil Agarwal told PTI that the hike was “quite expected” in view of the prevailing geopolitical situation, and estimated, "The rise will have around 3 per cent impact on freight costs".
"In the overall transport cost, the impact will be fractional. However, the government should ensure that traders do not increase prices of products disproportionately in view of the fuel price hike,” he added.
He asserted that the state governments could reduce local levies to cushion the impact as the truckers were already under stress.
“Coupled with rising logistics and transportation costs following the increase in diesel prices, these input cost pressures are likely to transmit steadily into downstream industries and retail markets,” Debopam Chaudhuri, Chief Economist, Piramal Finance, told ET Online.
Chaudhuri further expects meaningful upside risks to retail inflation over the next three months, with headline inflation potentially moving closer to the 5% mark over the next three months, if current energy prices persist.
Economists noted that a Rs 3 hike in fuel prices will have a direct impact of 15 to 20 basis points on headline inflation, given the weightage of petrol and diesel in the CPI basket.
The inflation risks are skewed to the upside, as geopolitical risks persist and El Niño weighs on food shock-led inflation, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said.
Bhardwaj expects average CPI inflation to touch 5%, with an assumption of Rs 10/litre hike in retail fuel price in the base case.
However, if the West Asia crisis prolongs, the economist said, then additional pass-through will be necessary. In the adverse scenario, she expects average inflation to move towards 5.7%.
RBI’s inflation measures
The development could complicate the Reserve Bank of India’s inflation management strategy at a time when expectations of halted rates had started building.
In the April monetary policy statement, the central bank projected core inflation at 4.4 per cent for 2026-27 and, excluding precious metals, it was even lower, indicating that underlying inflation pressures are expected to remain contained.
After the fuel prices were raised by Rs 3 per litre on Friday, economists still expect the central bank to hold the key lending rate, signalling that there is a lack of significant room for further monetary easing at this stage.
Banks are becoming increasingly reluctant to absorb additional liquidity despite RBI support measures, Chaudhuri said. “At the same time, elevated wholesale inflation across crude derivatives and petrochemical products indicates that input cost pressures are steadily building within the economy. As these higher costs begin transmitting across supply chains, the broader economy is likely to move into a more persistently high-price environment over the coming months.”
Indranil Pan, Chief Economist at Yes Bank, asserted that monetary easing was nowhere in the picture in FY27, and at best, before the West Asia crisis, the economists were anticipating a long hold of the repo rate by the RBI.
“Industrial raw material prices within the WPI have increased and that should get passed on to the retail side,” Pan said.
Relief for OMCs: Complete or partial?
The modest hike in retail price of Rs 3/litre for petrol and diesel provides limited relief to the oil marketing companies, Prashant Vasisht, Senior Vice President and Co-Group Head, Corporate Ratings. ICRA Ltd. told ET Online.
However, ICRA estimated that at a crude price of $105-110/barrel and considering the past 10-year average crack spreads of auto fuels, oil marketing companies incur a loss of about Rs 500 crore daily on the sale of auto fuels and domestic LPG, even after factoring in the fuel price hike.
More price hikes ahead?
Vasisht warned that OMCs would need to relook at the retail prices in case elevated crude oil prices persist.
Garima Kapoor, Deputy Head of Research and Economist at Elara Capital also warned of further price hikes, warning that a cumulative 10% hike will take the Consumer Price Index up by 50 bps. “This is the direct impact. Indirect second round impact will be over and above that,” she added.
“The secondary effects typically take 3-4 months to work through the system as we see taxi fares rising and transport operators increasing their prices,” Madan Sabnavis, Chief Economist, Bank of Baroda noted.
Meanwhile, Aditi Nayar, Chief Economist, ICRA Ltd., expects the fuel price hike to push up the average CPI inflation print by ~25 bps on an annualised basis.
“Since the hike was effected mid-month, this impact will be spread over the May and June 2026 CPI inflation prints,” Nayar told ET Online.
The government, too, may be attempting to balance fiscal pressures and subsidy burdens while ensuring fuel retailers remain financially viable in a volatile global energy environment.
“While the increase may temporarily add to inflation concerns and impact transportation and consumption costs, it also indicates the government’s focus on managing fuel subsidies and protecting forex reserves amid ongoing global uncertainty,” Jateen Trivedi, VP Research Analyst of Commodity and Currency at LKP Securities, told ET Online.
Alongside petrol and diesel, the price of Compressed Natural Gas (CNG) has also been hiked by Rs 2/kg, raising the gas bill to Rs 84 per kg in Mumbai and Rs 79.09 per kg in Delhi.
Also read: Petrol Price Hike: The crude shock logic that will make Indians pay a higher price
The decision is expected to add fresh inflationary pressure to the Indian economy, with economists warning that higher fuel costs could gradually make transportation, logistics and retail goods more expensive in the coming months.
Since the Gulf conflict began, oil and natural gas have been among the most impacted commodities with disturbances in the Strait of Hormuz, a key waterway near Iran that accounted for 34% of the world’s seaborne crude oil trade, with China and India receiving 44% of the share.
Calling the price hike a “long-anticipated move”, Radhika Rao, Senior Economist and Executive Director, DBS Bank, said that higher pump prices are likely to moderate demand and consequently the import burden.
Fuel prices and India’s inflation paradigm
Diesel remains the backbone of India’s transport economy, powering trucks, buses, agricultural equipment and industrial logistics networks. A slight rise in fuel prices can have a rippling effect across industries and supply chains, eventually raising the cost-of-living in the country.
The Gulf war has already cast its shadow on India’s inflation statistics with retail inflation inching up to 3.48% in April, as compared to 3.4% in March.
The West Asia crisis has changed the inflation dynamics dramatically, with April Wholesale Price Index (WPI) inflation also printing to 8.3% from 3.86% in March, driven by higher crude prices and higher core prices.
While fuel availability remains stable, the hike is likely to intensify inflationary pressures across the economy, Ajit Mishra, SVP, Research at Religare Broking Ltd., noted, adding that higher transportation and logistics costs could gradually push up prices of essential goods and services, increasing the burden on household budgets and raising overall cost-of-living concerns in the near term.
Also read: Fuel price hike may push up freight costs by 3%: Transport operators
Trucks, buses, rail freight, farm machinery and industrial logistics networks rely heavily on diesel, implying that any increase in fuel costs could raise the price of transporting vegetables, grains, milk, medicines, FMCG products and e-commerce deliveries.
The impact of higher diesel prices could become particularly visible in food inflation, an area where India remains highly sensitive due to the large dependence of agriculture and food distribution on fuel-driven logistics. Diesel powers a significant part of the rural economy, from tractors, harvesters and irrigation pumps to trucks transporting produce from mandis to urban consumption centres.
Any sustained increase in diesel costs raises input expenses across the agricultural supply chain, especially for perishable commodities such as vegetables, fruits and milk, where transportation speed and cold-chain logistics play a critical role.
Higher diesel prices may add another layer of pressure to food prices by increasing irrigation costs in water-stressed regions and making transportation more expensive during periods of supply tightness. Staples such as cereals and pulses could also face indirect cost pressures through higher freight and storage expenses. With food inflation carrying a significant weight in India’s consumer price index basket, economists warn that sustained fuel-led cost escalation may quickly spill over into broader household inflation.
Transport operators have already warned that the fuel price hike would increase the overall freight cost by around 3 per cent, and urged the government to ensure that traders cannot increase product prices disproportionately.
Also read: CNG Price Hike: Natural gas gets costlier by Rs 2 per kg after petrol, diesel rate shock
All India Transporters' Welfare Association joint secretary Sunil Agarwal told PTI that the hike was “quite expected” in view of the prevailing geopolitical situation, and estimated, "The rise will have around 3 per cent impact on freight costs".
"In the overall transport cost, the impact will be fractional. However, the government should ensure that traders do not increase prices of products disproportionately in view of the fuel price hike,” he added.
He asserted that the state governments could reduce local levies to cushion the impact as the truckers were already under stress.
“Coupled with rising logistics and transportation costs following the increase in diesel prices, these input cost pressures are likely to transmit steadily into downstream industries and retail markets,” Debopam Chaudhuri, Chief Economist, Piramal Finance, told ET Online.
Chaudhuri further expects meaningful upside risks to retail inflation over the next three months, with headline inflation potentially moving closer to the 5% mark over the next three months, if current energy prices persist.
Economists noted that a Rs 3 hike in fuel prices will have a direct impact of 15 to 20 basis points on headline inflation, given the weightage of petrol and diesel in the CPI basket.
The inflation risks are skewed to the upside, as geopolitical risks persist and El Niño weighs on food shock-led inflation, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, said.
Bhardwaj expects average CPI inflation to touch 5%, with an assumption of Rs 10/litre hike in retail fuel price in the base case.
However, if the West Asia crisis prolongs, the economist said, then additional pass-through will be necessary. In the adverse scenario, she expects average inflation to move towards 5.7%.
RBI’s inflation measures
The development could complicate the Reserve Bank of India’s inflation management strategy at a time when expectations of halted rates had started building.
In the April monetary policy statement, the central bank projected core inflation at 4.4 per cent for 2026-27 and, excluding precious metals, it was even lower, indicating that underlying inflation pressures are expected to remain contained.
After the fuel prices were raised by Rs 3 per litre on Friday, economists still expect the central bank to hold the key lending rate, signalling that there is a lack of significant room for further monetary easing at this stage.
Banks are becoming increasingly reluctant to absorb additional liquidity despite RBI support measures, Chaudhuri said. “At the same time, elevated wholesale inflation across crude derivatives and petrochemical products indicates that input cost pressures are steadily building within the economy. As these higher costs begin transmitting across supply chains, the broader economy is likely to move into a more persistently high-price environment over the coming months.”
Indranil Pan, Chief Economist at Yes Bank, asserted that monetary easing was nowhere in the picture in FY27, and at best, before the West Asia crisis, the economists were anticipating a long hold of the repo rate by the RBI.
“Industrial raw material prices within the WPI have increased and that should get passed on to the retail side,” Pan said.
Relief for OMCs: Complete or partial?
However, ICRA estimated that at a crude price of $105-110/barrel and considering the past 10-year average crack spreads of auto fuels, oil marketing companies incur a loss of about Rs 500 crore daily on the sale of auto fuels and domestic LPG, even after factoring in the fuel price hike.
More price hikes ahead?
Vasisht warned that OMCs would need to relook at the retail prices in case elevated crude oil prices persist.
Garima Kapoor, Deputy Head of Research and Economist at Elara Capital also warned of further price hikes, warning that a cumulative 10% hike will take the Consumer Price Index up by 50 bps. “This is the direct impact. Indirect second round impact will be over and above that,” she added.
“The secondary effects typically take 3-4 months to work through the system as we see taxi fares rising and transport operators increasing their prices,” Madan Sabnavis, Chief Economist, Bank of Baroda noted.
Meanwhile, Aditi Nayar, Chief Economist, ICRA Ltd., expects the fuel price hike to push up the average CPI inflation print by ~25 bps on an annualised basis.
“Since the hike was effected mid-month, this impact will be spread over the May and June 2026 CPI inflation prints,” Nayar told ET Online.
The government, too, may be attempting to balance fiscal pressures and subsidy burdens while ensuring fuel retailers remain financially viable in a volatile global energy environment.
“While the increase may temporarily add to inflation concerns and impact transportation and consumption costs, it also indicates the government’s focus on managing fuel subsidies and protecting forex reserves amid ongoing global uncertainty,” Jateen Trivedi, VP Research Analyst of Commodity and Currency at LKP Securities, told ET Online.
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