India may need substantially higher fuel prices to deal with the economic fallout from elevated crude oil prices, with Kotak Institutional Equities arguing that the recent petrol and diesel price increases are insufficient and that an additional ₹13–17 per litre hike may be required to fully offset mounting losses at oil marketing companies (OMCs).
The brokerage said recent government actions—including fuel price hikes, higher gold import duties and austerity measures—may not be enough to address broader macroeconomic challenges if the ongoing West Asia conflict continues and crude oil prices remain elevated.
“The central and state governments’ recent actions to manage the economic fallout of the ongoing West Asia war may not be adequate to address India’s growing macroeconomic challenges,” Kotak Institutional Equities said.
Recent fuel hikes
Fuel prices have already been raised twice within a span of a week. Following an earlier ₹3 per litre increase, petrol and diesel prices were further raised by 90 paise per litre on Tuesday, according to PTI.
However, Kotak believes these increases do not adequately compensate for losses incurred by state-run fuel retailers.
The brokerage estimates that OMCs are currently suffering losses of around ₹25,000 crore every month due to under-recoveries.
Diesel under-recovery is estimated at ₹11.40 per litre, while petrol under-recovery stands at approximately ₹14.30 per litre. Based on these estimates, Kotak believes another ₹13–17 per litre increase may be required to fully neutralise losses.
Reports indicate further fuel price increases have not been ruled out. Business Today TV reported that oil companies are attempting to recover losses accumulated over the last 75 days, although future hikes may continue in a gradual manner.
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More hikes may come
While additional fuel price hikes remain possible, policymakers and oil companies appear to be taking a calibrated approach to avoid a sudden inflation shock.
An Indian Oil Corporation (IOC) official told Informist that gradual increases are intended to protect consumers and limit inflationary pressures.
Earlier this week, Sujata Sharma, Joint Secretary at the Ministry of Petroleum and Natural Gas, said oil companies were incurring around ₹750 crore in daily losses, although the May 15 price increase had reduced losses by nearly one-fourth.
IDFC First Bank also expects further increases in retail fuel prices over the coming months due to ongoing under-recoveries.
On Monday, IDFC First Bank said it expects the cumulative increase in fuel prices to reach nearly 10% over the next few months, citing continued under-recoveries faced by oil marketing companies (OMCs). “Given the under-recoveries faced by OMCs, further increases in retail petrol and diesel prices are expected,” the bank said.
The anticipated rise in fuel prices could also have significant implications for inflation, adding another layer of pressure to the broader economy. IDFC First Bank highlighted inflation as one of the key risks emerging from sustained fuel price adjustments.
Inflation risks intensify
Higher fuel prices carry significant implications beyond consumer spending.
IDFC First Bank estimates that just the initial ₹3 per litre increase in petrol and diesel prices could add around 12 basis points to headline inflation.
The bank now expects May CPI inflation to rise to 3.9%, compared with 3.48% in April, while projecting FY27 average inflation at 4.9%, incorporating both fuel price increases and secondary inflationary effects across sectors.
Gold and broader macro stress
Kotak also questioned the government’s strategy of increasing gold import duty from 6% to 15%, arguing that while it may temporarily delay purchases, it also raises domestic gold prices and increases household gold values.
The brokerage suggested that a higher GST rate on gold may have been more effective than raising import duties.
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Meanwhile, crude prices hovering near $100 per barrel, and at times crossing $120, are creating wider macroeconomic risks.
Kotak estimates that every $10 per barrel rise in crude oil prices could widen India’s current account deficit by around $22 billion. It now expects FY27 GDP growth at 6% and average inflation at 5%, warning that balancing growth, inflation, fiscal deficit and external stability may become increasingly difficult if geopolitical tensions persist.
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