The Reserve Bank of India (RBI) may look through the immediate supply-side impact of higher oil prices in its monetary policy, but the escalating fuel costs are increasing the risk of broader inflationary pressures across the economy, says a report by Crisil. Retail petrol and diesel prices have increased by about Rs 7.5 per litre since May 15 and further hikes can be expected if crude prices remain elevated.

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Inflationary Impact of Fuel Price Hikes

"The direct upside to inflation linked to the Consumer Price Index (CPI) is estimated at ~36 basis points (bps) with a hike of Rs 7.5/litre in petrol and diesel prices, rising to ~48 bps if the retail fuel prices increase by Rs 10," the report said. While the CPI inflation currently remains below RBI's 4% target, as per Crisil "it is projected to move up but not cross the upper limit 6% tolerance band."

"With oil marketing companies gradually paring their losses (or under-recoveries), cumulative hikes could move closer to Rs 10/litre in the near term. The broader effect will reverberate across the economy through higher transport costs, pushing up both food and core inflation," it said.

Ripple Effects on Transport and Economy

"Crude prices have averaged ~$112/barrel for the first two months of this fiscal, with our base case expectation at ~$95/ barrel for the full fiscal," the report added. It said transport is a major channel through which fuel inflation radiates across the economy.

"While freight transport accounts for 54%2 of India's logistics cost, road transport represents nearly 71%3 of total freight movement. The increase in retail fuel prices will directly impact these freight costs structures and feed into prices across supply chains in the coming months," Crisil said.

RBI Policy Outlook

"We expect the RBI Monetary Policy Committee (MPC) to look through these supply-side impressions on CPI price inflation. But it is likely to remain watchful of spill-over risk to household inflation expectations, and the possibility of the second round leading to generalization of price pressures," the report said.

Monitoring Monsoon and Food Inflation

Crisil further noted that the "implications of expected below-normal monsoon and evolving El Nino conditions on food inflation will also be monitored."(ANI)