Petrol, diesel prices can rise by Rs 12, LPG by Rs 280 a cylinder: Nomura

Petrol, diesel and LPG (liquefied petroleum gas) prices are set to burn a bigger hole in your wallet and upset the household budget over the next few weeks, warn analysts. Since March 22, petrol and diesel prices have risen cumulatively by around Rs 6.40-6.50 per litre (i.e., by 6.3 per cent and 7.1 per cent respectively), as of March 31.

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“We expect further price hikes of Rs 12 for petrol and diesel (this assumes global petrol/diesel prices of $132-136 a barrel, which corresponds to Brent crude oil price of $112 a barrel). LPG prices have been raised by Rs 50 per cylinder for a 14.2 kg cylinder (i.e., by around 5.5 per cent). Around Rs 280 per cylinder increase is still pending to avoid under-recoveries. This reflects higher commodity prices and escalation of other costs like shipping, insurance and logistics overheads,” wrote Sonal Varma, chief economist for India and Asia ex-Japan at Nomura in a recent co-authored note with Aurodeep Nandi.

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Higher cost of fuel, including higher gas prices, will make transportation services expensive – railways, bus, taxi/auto rickshaw, school bus and air fares (the latter reflects prices of aviation turbine fuel. Cumulatively, transport services account for 2.45 per cent of the CPI (consumer price index) basket.

GRAPHIC: How fuel price rise impacts inflation

“A 5-10 per cent rise in fares could lead to an additional second-round impact of 0.1-0.2pp to headline inflation. There will likely be further spillovers as manufacturers and service providers pass on these higher input costs eventually to consumers,” Nomura said.

The only silver lining, they believe, is of the government cushions the impact by cutting excise duty over and above the Rs 5 per litre for petrol and Rs 10 per litre for diesel announced in 2021.

“As of now, the government has resisted cutting excise taxes due to oil price volatility; however if high oil prices sustain, then a cut could be announced sometime during the next one-two quarters,” they said.

Double whammy

Besides the petrol, diesel and LPG prices, compounding the woes for manufacturers and consumers alike is the sharp hike in prices of natural gas starting April 1 for a period of six months.

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On Thursday, the government more than doubled the price of natural gas that is used to produce electricity, fertilisers, turned into CNG and piped to household kitchens (PNG) for cooking to $6.10 per million British thermal unit (MMBtu) from the current $2.90 per MMBtu. Analysts at Jefferies expect gas prices to head even higher over the next few months and hit $ 9.2 per MMBtu by October 2022.

“While passing through $9.2 APM gas price will not be easy, we think there is enough headroom for city gas distribution (CGD) companies to raise prices with economics aided by higher crude likely reflecting in higher petrol and diesel prices,” wrote Pratik Chaudhuri and Bhaskar Chakraborty of Jefferies in a recent note.

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All this, believe analysts at Nomura, will put pressure on companies to pass on the hike in commodity prices to consumers, which is likely to affect the retail prices of home appliances, vehicles, personal care products and FMCG products.

“Rising farming costs (fertilisers/pesticides, diesel and farm equipment) and higher global food prices are likely to indirectly influence the minimum support price settings this year. Higher global edible oil prices and India’s exports of wheat may also put an upward pressure on food price inflation. Reopening-related upward pressure on prices of services are likely in segments such as recreation and personal care services. Due to these pressures, we believe headline inflation will continue to breach the RBI’s upper-bound target of 6 per cent for most of 2022, averaging 6.3 per cent y-o-y,” Varma and Nandi of Nomura wrote.
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Twitter: @Pun_ditry

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