Vehicle fuel prices responsible for around 30% of April inflation spurt

The increase in retail price inflation in petrol and diesel for vehicles for personal use contributed around 30 per cent to the rise in year-on-year inflation in April over March.

The inflation rate rose by 0.84 percentage points at 7.79 per cent in April against 6.95 per cent in the previous month, making it a fourth consecutive month when the rate of price rise remained above the Reserve Bank of India’s (RBI’s) upper tolerance level of 6 per cent.

Within overall inflation, the rate of price rise of petrol for vehicles rose by 10.72 percentage points and that for its diesel equivalent by 11.04 percentage points. Petrol for vehicles has a weighting of 2.18697 per cent and diesel for vehicles 0.14800 per cent in the consumer price index (CPI). So, together they have around 2.32 per cent weight in the CPI.

This impact of petrol and diesel does not include buses, taxis, and three-wheelers, which together have around a 2 per cent weighting in the CPI. It does not include other indirect impacts of the rise in prices of these fuels either.

The full indirect impact comes with a lag of two-three months but it has started becoming visible in the April data partly, according to experts. The oil-marketing companies started raising prices of petrol and diesel from March 22 this year after a big pause since Diwali on November 4, 2021. Inflation in petrol and diesel for vehicles did not rise in March. Rather, that for petrol was the lowest at 10.21 per cent in March 2022 since November 2020. For diesel it was at the bottom at 5.19 per cent in the last month of 2021-22 since February 2020.
 

Now the issue is how monetary policies of the Reserve Bank of India (RBI) will help curtail inflation when inflation is led by price rise in petrol and diesel, besides rise in global rates of other commodity prices.

The RBI’s Monetary Policy Committee is likely to hike the repo rate in June after it had announced a 40 basis point increase in it in an off-cycle announcement earlier this month.

Former chief statistician Pronab Sen said monetary tools could not in themselves address cost-push inflation.

“Companies are passing on cost increases. They are protecting their margins. In fact, margins have gone up, not down. Customers are paying the price. Monetary policy prevents that to an extent,” he said.

India Ratings Chief Economist Devendra Pant said monetary policy was a blunt tool.

“It does not give effect before six-nine months because of transmission problems.”

ICRA Chief Economist Aditi Nayar cautioned against over-tightening in monetary actions. “Over-tightening is not warranted since inflation is being led by global supply-side factors, and mar economic growth,” she said.