Petrol, diesel prices hiked by Rs 3 per litre, covers only part of losses incurred by oil PSUs

According to industry sources and analysts, the quantum of this hike will only partially ease the pressure, as the gap between the retail fuel prices and the market price is much wider. More calibrated and staggered price hikes could be on the cards. As of early this week, the OMCs were losing Rs 14 per litre on petrol and Rs 42 on diesel, according to industry sources. The OMCs are also incurring losses on LPG sales to households and jet fuel supplied for domestic flights, where only a fraction of the price escalation was passed on.

Public sector oil marketing companies (OMCs) hiked petrol and diesel prices by Rs 3 per litre on Friday, the first price increase in over four years, as they continue to grapple with financial strain amid the West Asia crisis. Petrol is now priced at Rs 97.77 per litre, and diesel at Rs 90.67 in Delhi. Fuel prices vary across states due to differences in state-level taxes. Along with petrol and diesel prices, CNG prices were also hiked by Rs 2 per kg in cities like Delhi and Mumbai.

Global crude oil prices have surged by over 50% due to the West Asia war and the consequent closure of the Strait of Hormuz, but in a bid to insulate domestic consumers, the government-owned OMCs hadn’t passed on the higher rates for retail petrol and diesel. In fact, prices of the two auto fuels hadn’t been hiked for over four years, although cut once — before the 2024 Lok Sabha polls.

According to industry sources and analysts, the quantum of this hike will only partially ease the pressure, as the gap between the retail fuel prices and the market price is much wider. More calibrated and staggered price hikes could be on the cards. As of early this week, the OMCs were losing Rs 14 per litre on petrol and Rs 42 on diesel, according to industry sources. The OMCs are also incurring losses on LPG sales to households and jet fuel supplied for domestic flights, where only a fraction of the price escalation was passed on.

Discussions on a hike in petrol and diesel prices had gathered pace within the government, with a consensus that an increase was necessary. The key considerations were the timing and the quantum: whether to do it imminently or hold prices for longer, and whether to announce a steep hike in one go or adopt a staggered approach, according to a top government official.

A staggered approach was evidently chosen. A one-shot steep price hike wouldn’t have been politically palatable, and would have had a shock factor to it, industry sources said. Calibrated price hikes give the government the opportunity to pass on the higher prices to consumers gradually, while keeping a tab on the public reaction and the inflationary impact on an ongoing basis, instead of the inflationary shock and backlash that a steep hike might lead to.

Besides directly having a bearing on the Consumer Price Index (CPI), fuel prices have an indirect impact on inflation as they affect the cost of freight and logistics, as well as energy and input costs for various sectors.

The timing of the global surge in energy prices, which clashed with assembly elections in some states, made it politically fraught for fuel prices to be hiked. With the elections over, a hike in prices was in the offing. Early May, a top government official had told The Indian Express that a hike was “inevitable” and “only a matter of time”.

“Given the weightage of petrol and diesel in the CPI basket, a 3-5% increase (in fuel prices) likely adds about 15-25 bp (basis points) to the headline inflation, besides second round impact,” said Radhika Rao, senior economist and executive director, DBS Bank.

Rao added that the price hike was a “long-anticipated move”, and could lead to some bit of moderation in fuel demand. She also recounted that back in 2022, amid the global oil and fuel price surge in the wake of Russia’s invasion of Ukraine, retail fuel prices were hiked by about 9-10% in two steps. A few other analysts also expect more calibrated price hikes in the coming days.

The crisis has put the OMCs — Indian Oil, Bharat Petroleum, and Hindustan Petroleum — under severe financial stress. Petroleum Minister Hardeep Singh Puri said Tuesday that combined losses of the three refiners-cum-fuel retailers are projected at Rs 1 lakh crore in the April-June quarter at the current price levels, enough to wipe out their collective profits for the entire 2025-26 (FY26).

According to Sehul Bhatt, director, Crisil Intelligence, this hike, alongside a marginal softening in international crude prices offers OMCs a degree of operational breathing room, but the “overhang is far from gone”. “The latest price increase is, therefore, aimed at containing incremental balance sheet stress rather than restoring marketing margins, and is better read as a policy acknowledgement that absorbed costs must eventually reflect in prices,” Bhatt said.

The government had slashed excise duty by Rs 10 per litre on petrol and diesel late March to blunt the impact of high international prices on the OMCs, but the retailers continue to bleed heavily on fuel sales. The excise duty cut has resulted in the government foregoing revenue of about Rs 14,000 crore a month.

While the country has managed to secure adequate crude oil volumes from non-Gulf suppliers and has not faced a shortage of crude, refiners have been paying for the oil through their nose, spending valuable foreign exchange. With uncertainty over how long the crisis might last, Prime Minister Narendra Modi recently appealed for conservation of petroleum fuels, among other measures, aimed at moderating imports and foreign exchange outgo.

Retail prices of petrol and diesel are deregulated, in practice, the government-owned OMCs — with 90% market share in fuel retail — kept prices stable in consultation with the government. They incurred losses when international oil prices surged, and earned profits when the prices slumped. But the Strait of Hormuz crisis goes much beyond the regular oil market volatility.

The Indian crude oil basket, which averaged $70 per barrel last year, averaged over $114 in April. Indian refiners are incurring high additional costs due to emergency sourcing from the spot market and surging shipping and insurance rates. Oil imports in 2025-26 stood at about $135 billion. If oil prices sustain at $100 in the current fiscal and import volumes don’t decline, the oil import bill could be upwards of $200 billion for the year.