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Even as geopolitical risks fade, with 33 ships crossing the Strait of Hormuz over 24 hours (with permits), oil futures indicate Brent at or above US$90/bbl for another six months at least. Going forward, if oil prices stay below US$100, further hikes may be unnecessary other than to bring back the Rs10/l cut in excise. The relatively muted retail price increases in India (+8%) vs. those seen globally (median 30%) have created fears of large further increases. This is misplaced, as India’s refining self-sufficiency effectively halves the necessary hikes in India: it only needs to adjust for US$64bn of higher crude annually (at US$105/bbl). There is no need to incorporate another US$50bn equivalent jump in refining spreads (at 15-May levels), which some countries have had to.
Jump in pump prices globally a wrong benchmark for India
Fuel prices at the pump have gone up sharply in several countries. Fears of large pending hikes in India (up only 8% so far) appear misplaced, in our view, once we account for: i) India’s refining capacity surplus; and ii) counter-cyclical fiscal adjustments (India had raised taxes when crude fell; adjusted for the Rs10/l cut in excise, prices are up 18% in India). Refining self-sufficiency effectively halves the necessary hikes in India, as it only needs to adjust for US$64bn of higher crude annually (at US$105/bbl). Others also need to incorporate another US$50bn jump in refining spreads (at 15-May levels). With 9% of global refining capacity knocked out, refining cracks are ~3x pre-war levels. Refining surplus also delivers US$8-10bn of gains on the current account as it is exported.
To be profitable (oil US$105, USDINR 96), OMCs need Rs5-10/l of further hikes
Offsetting the material deterioration in marketing margins for Indian OMCs (Rs19/l loss on auto fuels) is the gain from elevated refining cracks: the blended margin is down only from Rs13/l pre-war to Rs4/l currently. As OMCs market more than they refine, they buy some refined products for sale: we assume these are procured from Indian private refiners at export parity prices. Still, to get to pre-war net margins for OMCs, the blended margin needs to be Rs9/l, implying Rs5/l of further hikes. If LPG prices are not hiked further, to offset the Rs740bn of annualized losses, another Rs5/l may be needed.
BoP, inflation-fiscal trade-off and the policy outlook
Crude prices are stabilising with easing geopolitical risks, but oil futures still show prices above US$90/bbl for another six months; the Rs10/l excise cut also needs to be reversed. Fuel price hikes so far imply a direct impact of ~35bps on CPI inflation; another Rs5-10/l could add 20-40bps. However, we see this just as a temporal adjustment: fiscal intervention spreads the impact on growth and inflation over time. The more immediate and necessary factor necessitating price transmission is the INR: FX markets are now getting the signal that the INR will not be forced to bear the entire burden of terms-of-trade adjustment.
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