Weaker Rupee, High Taxes Leave Little Room To Cut Prices Of Petrol, Diesel While Crude Tumbles
Unleaded fuel drips from a petrol pump at an ASDA Group Ltd. supermarket gas station in this arranged photograph in Croydon, U.K. (Photographer: Luke MacGregor/Bloomberg)

Weaker Rupee, High Taxes Leave Little Room To Cut Prices Of Petrol, Diesel While Crude Tumbles

While global economic uncertainty because of the new coronavirus outbreak has made crude cheaper, Indian consumers are unlikely to benefit because of high taxes and a depreciating rupee.

Brent crude dropped 11 percent in the first four days of this week to $52.18 a barrel. But, according to the website of state-run Indian Oil Corporation Ltd., petrol prices in Delhi were cut by 5 paise to Rs 71.96 a litre till Thursday.

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A weaker rupee wiped off gains that could have translated into a reduction in prices of petrol and diesel, a government official said on the condition of anonymity. The Indian currency depreciated 1.14 percent in the last one month against the dollar to 72.15 on Friday. According to Petroleum Planning and Analysis Cell, every Re 1 fall in the local unit against the American currency, India’s oil import bill will increase by Rs 2,729 crore in January-March.

The smaller cut in retail fuel prices can be explained by the time lag in the formula and rupee depreciation, K Ravichandran, senior vice-president at ICRA Ltd., told BloombergQuint. Oil marketing companies revise petrol and diesel prices daily considering a 15-day average, factoring in global fuel indices.

Also, Ravichandran said, oil companies may have retained some additional margins to offset the inventory losses which they would suffer due to fall in prices. Refiners lose money on inventory bought at a higher prices as the retail prices are pegged to prevailing market rates.

The other thing that has kept India’s retail fuel prices high despite a cheaper crude in the past few years are state and central levies. For instance, according to the breakup on Indian Oil’s website, taxes contribute nearly 50 percent to the price of petrol at pumps in Delhi—nearly 28 percent central excise and about 22 percent value-added tax—as of Feb. 16. To be sure, VAT rate varies with each state.

Meanwhile, the declining crude prices have intensified speculation that OPEC block and its allies will agree to cut output for supporting prices. According to a note by Standard Chartered Global, oil could fall below $30 a barrel if OPEC+ decides to delay a deeper cut in production.

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