Indian Rupee Reaches Critical Threshold Amid Fuel Price Hikes

The State Bank of India's Economic Research Department has published a report on the 'RUPEE', authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

Retail fuel prices have been increased by Rs 3 per liter to help oil marketing companies (OMCs) recover losses due to higher Brent crude prices. The OMCs are incurring under-recoveries on sales of petrol and diesel amounting to around Rs 1.98 lakh crore this quarter.

The hike is expected to provide a relief of Rs 52,300 crore in OMCs' under recoveries, which is 15% of the expected total loss of OMCs in FY27. However, further rupee depreciation can exhaust all these gains by increasing the $ price of crude import.

The report estimates that even an additional depreciation of Rs2 in the rupee raises the effective crude oil price pushing the landed import cost which fully offsets the gains from the fuel price hike. Thus, the rupee has already approached a critical depreciation threshold, beyond which further currency weakness could substantially erode the intended benefits of domestic fuel price revisions.