After Rs 3 fuel hike, can petrol and diesel prices rise further? Experts decode

After public sector oil marketing companies raised petrol and diesel prices by around Rs 3 per litre across metro cities, attention is now shifting to a bigger question: will fuel prices see another hike in the coming weeks? While the latest increase offered partial relief to state-run oil retailers facing mounting losses, industry executives and analysts suggest that the possibility of further increases cannot be ruled out.

The recent fuel price revision comes after a prolonged period of pricing pressure on Indian oil companies, driven by elevated global crude prices and widening under-recoveries. Though the increase was lower than many market participants expected, experts say it may not be enough to fully offset the financial strain on oil retailers.

Latest hike

According to estimates by ratings agency Crisil, state-run oil marketing companies continue to face under-recoveries of around Rs 10 per litre on petrol and Rs 13 per litre on diesel even after the latest increase. This means companies are still selling fuels below their cost levels.

Oil companies follow a pricing mechanism linked largely to global crude prices and international fuel benchmarks, along with domestic taxes. The sharp rise in global crude prices has significantly increased input costs.

The cost of crude for Indian refiners has jumped around 53%, rising from an average of $69 a barrel in February to more than $106 per barrel in May. However, the increase in benchmark prices for petrol and diesel has been even steeper, climbing by roughly 75%.

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Analysts say these numbers indicate that the recent Rs 3 per litre increase may only partially bridge the pricing gap.

Radhika Rao, Senior Economist & Executive Director, DBS Bank, said: "India raised fuel prices on Friday morning, with petrol and diesel prices up around INR 3/litre, taking petrol prices higher by INR3.14/l up to INR 97.77/l and diesel prices by INR 3.11/litre to as high as INR 90.67/l across several cities, according to the press release. This was a long-anticipated move in light of the sharp rally in global crude prices and rising burden of these costs on domestic oil marketing companies as well as the fiscal books. Higher pump prices are likely to moderate demand and consequently the import burden."

Rao added: "Given the weightage of petrol and diesel in the CPI basket, a ~3-5% increase likely adds ~15-25bp to the headline inflation, besides second round impact. Retracing the steps back in 2022, authorities had raised the retail pump prices in two steps cumulatively by around 9-10%, before acting on excise duties and windfall taxes, which nearly neutralised the overall fiscal impact."

Government approval

Industry executives reportedly have not ruled out another round of price increases. However, they indicated that any further hike could depend on government approval, including its timing and extent.

The increase came shortly after elections concluded in four states and Puducherry, leading to speculation over whether political considerations delayed pricing action.

The government has historically intervened during periods of sharp fuel inflation through excise duty reductions and pricing measures. In March 2024, for example, the Centre reduced excise duty by Rs 2 per litre.

Earlier intervention had also helped narrow losses. Crisil Intelligence Director Sehul Bhatt told The Times of India oil marketing companies at one stage were absorbing losses of Rs 23–30 per litre on petrol and diesel. Government excise duty relief helped reduce those losses to around Rs 14–17 per litre.

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Losses remain significant

Indian Oil Corporation, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd had reportedly been facing daily under-recoveries of nearly Rs 1,000 crore earlier. Estimates now suggest losses may have reduced to roughly Rs 500 crore a day following the latest price revision.

Despite the improvement, financial pressure remains considerable. Companies are also absorbing losses on domestic LPG cylinders and operating under limits on aviation fuel price adjustments.

Global comparisons and market outlook

Government officials have defended fuel pricing decisions by pointing to global trends. Petrol prices in the United States reportedly rose more than 44% in a little over two months, while diesel surged nearly 48%. Canada and New Zealand also recorded substantial increases.

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With global crude prices remaining elevated and under-recoveries still present, analysts believe the possibility of another petrol and diesel hike remains open. Whether consumers face additional increases may ultimately depend on crude trends and how much pricing flexibility the government is willing to allow in the coming weeks.

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