The surge in crude oil prices since June-end and spectre of the Indian basket of crude touching $100/barrel once again have led to significant upward revisions of inflation forecasts for the third and final quarters of the current fiscal year. Though it is unlikely that state-run oil marketing companies will raise the retail prices of auto fuels in tandem with the spike in cost of crude given the spate of elections on the anvil, expensive crude could jack up prices of a wide range of commodities and intermediate goods, and fan imported inflation.
However, if oil prices continue to rise relentlessly, a partial pass-through could be expected. While OMCs had posted profits in the past two quarters, they are now seen to be suffering under-recoveries to the tune of Rs 7/litre on sale of petrol and diesel.
The price of Indian crude oil basket was at $97.03/ bbl on Friday, as per data from the Petroleum Planning & Analysis Cell.
India Ratings and Research said in its report on Friday that retail inflation might rise to 5.9-6.1% in the third quarter of FY24 from its earlier forecast of 5.8%. In the final quarter, the agency has revised its estimate for retail inflation to 5.3-5.5% from 5.1% estimated earlier.
The rating agency has also revised the cost of Indian oil basket for the second half of FY24 to $94.50/bbl from its earlier forecast of $87.80/bbl.
“A 1% increase in the cost of Indian oil basket increases the retail inflation by 4bp if the pass through (to consumers) is full and 2bp if the pass through is 50%,” the report said. “If the average cost of Indian oil basket increases to $94.50/bbl during the second half of FY24, then average retail inflation for FY24 would increase to 5.7% in case the pass through to consumers is full,” it said.
Gaura Sengupta, economist at IDFC First Bank, said: “If you look at FY24 average of Wholesale Price Index (WPI), because it had declined sharply in the first half of FY24, the whole year average could still be 0.3% compared to 9.6% in FY23,” said Gaura Sengupta, economist at IDFC First Bank. “The rise is crude oil prices will reflect in WPI but is not expected to have a significant impact on Consumer Price Index (CPI), as we expect retail petrol and diesel prices to remain unchanged in FY24,” she said.
Sengupta sees WPI in the third quarter of FY24 at 1.3% and 3.3% in the final quarter due to a combination of rise in crude prices and less supportive base effect. “Headline consumer price index in the third quarter is expected to be at 5.8% and is seen at 5.6% in the fourth quarter,” she said.
“We expect the six-month average for Indian crude oil basket in FY24 at $90/bbl as supply side cuts by OPEC+ are likely to maintain pressure on crude oil prices. That said there are chances that OPEC + may rollback their cuts post December ,” Sengupta said.
WTI crude prices on the New York Mercantile Exchange were at $92.99/bbl on Friday, up 1.4% from the previous close and that of Brent was up by 0.69% at $96.04/bbl.
“West Texas Intermediate (WTI) crude prices can test a level of $98/bbl by December end and Brent prices can go up to $100/bbl,” said Manoj Jain, director, Prithvi Finmart. “If the crude oil supply is not resumed by Russia and Saudi Arabia, crude prices can go up in the first half of 2024. WTI can reach a level of $110-$115/bbl and Brent can go up to $120/bbl,” he said.
A rise in the cost of Indian oil basket will impact the wholesale inflation more than the retail as mineral oils and petroleum products carry a higher weight in the wholesale index, India Ratings said.
“An increase of 1% in the cost of Indian oil basket increases the wholesale inflation by 10bp. This translates into wholesale inflation increasing to 1.4% if the cost of Indian oil basket increases to $94.50/bbl,” the report said.
“We have projected the six-month average for Indian crude oil basket in FY24 at $90/bbl as there are chances that Russia and Saudi Arabia may extend their supply cut after December,” Sengupta said.
“Indian crude oil basket price can touch $100-110/bbl in the first half of 2024 as demand for crude from India and China is expected to rise as we move towards the winter season,” Jain said.
Meanwhile, India Ratings does not see the Reserve Bank of India (RBI) raising the interest rates in its next policy meeting but maintain the status quo and repo rate during the remainder of FY24. “The nominal anchor for monetary policy is retail inflation which is materially not going to be impacted much by global oil prices,” the agency said.
India’s current account deficit (CAD) narrowed to 1.1% of the gross domestic product (GDP) in April-June quarter of the current fiscal year, from 2.1% in the year-ago quarter, but widened sequentially from 0.2% registered in the fourth quarter of last fiscal, according to the data released by the RBI on Thursday.