Don’t expect fuel prices to come down below Rs 100/litre soon

Global crude prices expected to drop only after US signs nuclear deal with Iran and lifts sanctions; tight fiscal situation constraints any tax cuts by the Indian government

Sulekha NairUpdated: Tuesday, June 01, 2021, 08:17 PM IST
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Don’t expect fuel prices to come down below Rs 100/litre soon | File photo

The rise in fuel prices is expected to continue for some time. Fuel prices have been soaring after a pause during the elections till May 4, when state-owned oil firms ended an 18-day hiatus in rate revision they observed during assembly elections in states like West Bengal.

On Tuesday, (June 1), petrol and diesel were hiked for the second consecutive day reaching new highs across the country. After Tuesday’s hike, 17th since May, fuel prices are at a fresh all-time high across the country.

Fuel rates in global markets determine the rates of oil prices in India. “International crude prices will go up due to positive sentiment in the global economy as many economies have begun easing lockdowns. This will result in more demand for fuel”, said Rajnath Yadav, analyst at Choice Broking. When the demand for fuel rises, the prices will go up globally and this is bound to reflect in prices at home, he said.

Oil companies revise rates of petrol and diesel daily based on the average price of benchmark fuel in the international market in the preceding 15-days, and foreign exchange rates. On Tuesday, global oil benchmark Brent crude futures rose 1.24 percent to $70.18 per barrel.

In Mumbai, on Tuesday (June 1), the price of petrol and diesel stood at Rs 100.72 and Rs 92.69 per litre respectively.

Central and state taxes make up for 60 percent of the retail selling price of petrol and over 54 per cent of diesel. The Union government levies Rs 32.90 per litre of excise duty on petrol and Rs 31.80 on diesel.

If the government-both at the Centre and State-level are willing to reduce taxes, the price of petrol and diesel can be contained below Rs 100 per litre, said Yadav. But that seems unlikely considering India’s fiscal position now.

The government can borrow less once the tax collection is good. Hence, it is a short-term positive for the rupee, say analysts.

The taxes on fuel in India on a year-on-year basis has not gone up, said Anindya Banerjee, Vice President - Currency Derivatives Research, Kotak Securities Ltd. “Oil price is based on rupee and dollar. If dollar weakens, stock markets rise and the speculative prices of commodities continues, then the price of fuel will touch even $80 a barrel. If taxes come down, then it is a soothing impact on prices but it also means fiscal deficits will go up,” he said.

The current situation may ease once the nuclear talks to restore Iran’s 2015 nuclear deal, which is in its final states, is agreed upon, said Yadav. Then the chances are that prices will be around $60-$70 instead of the current range of around $70 per barrel, he said. When that happens, oil from Iran will flood global markets and Indian refiners may look to buy crude from Iran in payment terms. That will be beneficial for India, Yadav said.

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