Petrol, diesel to cost more; rupee's fall may not push up airfares for now

Consumers are currently paying six per cent more for petrol and 19 per cent more for diesel than what they did in May 2014. Even so, Indian Oil Corporation (IOCL), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) might need a further Rs 2.8-3.7 a litre increase in retail prices to earn normal margins.
 

The rupee’s fall might, however, not push up airfares for now. Airline executives say these rose only four to five per cent in May-June, as it was the holiday season. “The real capacity of airlines to increase prices would be seen when the season ends,” said an executive of a full-service carrier.
 
When the Narendra Modi government took charge at end-May 2014, the price of petrol in Delhi was Rs 71.41 a litre; it is now Rs 75.55. Diesel has gone up from Rs 56.71 to Rs 67.38 a litre. Crude oil averaged $106.85 a barrel in May 2014 and was down around 30 per cent to $75.31 a barrel in May 2018.
 
The exchange rate at end-May 2014 was Rs 58.66 a dollar; it has since fallen 18 per cent. According to an oil marketing company (OMC) official, every $1 increase in crude prices demands an increase of around 63p a litre in both diesel and petrol. And, every rupee depreciation against the dollar on the exchange rate requires a 50p increase in both prices.

 
“Based on this, the OMCs might have to go for a further retail price increase of Rs 2.8-3.7 a litre,” said an industry executive, who did not want to be named. The Indian basket of crude oil was $74.89 a barrel on Wednesday.
 
“Foreign portfolio investors are selling in the stock market and more payment for oil import is weakening the rupee. Every one rupee depreciation versus the dollar will result in an increase on the import bill by $2 billion. This is worsening the current account deficit and might lead to the retail price index rise crossing five per cent in the near term,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu India.
 
The depreciating rupee is a cause for concern for Indian airlines, as 25-30 per cent of their cost (excluding fuel) is dollar-denominated. Airline executives also say there is lack of transparency on how jet fuel is priced. “OMCs fix the price after taking into account variable costs such as ocean freight, customs duty, bank charges, insurance, etc. Only crude is imported; ATF (aviation turbine fuel) is manufactured in Indian refineries. So, levying such costs is totally unjustified,” said the chief executive of an Indian airline.

 
While fares have largely remained flat, the price of jet fuel price has risen 22 per cent and the rupee has depreciated six per cent from January.
 
“The sustained rise in crude, coupled with rupee depreciation, poses a near-term pressure on airline profitability. India’s aviation market remains an unattractive proposition as industry headwinds could weigh on sector profitability,” SBI CAPS said in a recent note to clients.
 
The central government levies a fixed excise duty of Rs 19.48 a litre on petrol and Rs 15.33 a litre on diesel. And, state governments impose value added tax on a percentage basis.