Why further fall in rupee could offset any gains expected from fuel price hike? 

Petrol and diesel prices were raised by ₹3 per litre today as the government finally looked to reduce the losses being incurred by the oil marketing companies due to the surge in crude oil prices in recent months. However, a falling rupee could yet wipe out any gains that the companies would have hoped from the price rise.

According to the economic research department of State Bank of India (SBI) , the current increase in oil price by ₹3 is likely to provide relief of ₹52,700 crore in OMCs under recoveries, which is 15 per cent of their expected total loss in the current financial year ending March 2027.

Earlier, the government had slashed the excise duty on petrol and diesel by ₹10. If the excise duty is further rationalised to zero, that would reduce OMCs losses further. 

But, all those gains could be wiped off if the rupee continues to slip. On May 15, the rupee hit a new all-time low of 96.14 against the US dollar intraday. A falling rupee increases the dollar price for imported crude oil. 

Assuming an average FY27 exchange rate of ₹94 per dollar, the per dollar, and an average Indian basket crude oil price of $106 per barrel, the present landed crude cost works out to nearly ₹9,964 per barrel, as per SBI estimates. The ₹3 per litre increase provides an estimated benefit of around ₹477 per barrel to OMCs, it added.

"However, even an additional depreciation of ₹2 in the rupee raises the effective crude oil price pushing the landed import cost which fully offsets the gains from the fuel price hike," the report stated. 

The rupee, it said, has already "moved beyond a critical depreciation threshold," beyond which more curren­cy weakness may substantially erode the intended benefits of fuel price revisions.

Will the price hike dent fuel demand? 

The SBI report noted that historical data showed that petrol and diesel price hike was followed by immediate decline in consumption. But, it generally tended to recover and overall no decline was visible in annual consumption levels. 

It expects a 15-20 basis points impact on Consumer Price Index (CPI) inflation over May-June. 

What if the excise duty on oil is cut to zero? 

The SBI research report estimates that should the excise on petrol and diesel be cut to zero from the current 11.9 per cent and 7.8 per cent respectively, it may lead to revenue gains for OMCs, but also reduce government revenue by ₹1.9 lakh crore. The fiscal deficit could also rise 0.5 per cent of GDP, if the government doesn't reduce expenditure.