September 1, 2013 5:42 pm

India refiner raises fuel prices for second time in month

General Indian Rupee Images©Bloomberg

India’s biggest oil refiner has raised fuel prices for the second time in a month as the industry copes with a depreciating rupee.

The move comes as the country’s policy makers attempt to reduce the current account deficit amid a crisis that has seen economic growth in the country fall to 4.4 per cent in the first quarter.

Announcing that petrol prices would rise by Rs2.35 ($0.04) per litre and diesel prices would increase by Rs0.50 per litre from midnight on Saturday, the state controlled Indian Oil Corporation, the country’s largest oil refiner by revenues, said Middle East tensions were also a factor in its decision.

The combination of a depreciating currency and the pressures on crude oil prices were a “perfect storm”, analysts at Barclays said in a note ahead of the announcement. They estimated that a Rs1 per litre increase in diesel prices would directly add about eight basis points to headline inflation, which stood at 5.79 per cent in the month of July.

Prakash Javadekar, spokesperson for the opposition Bharatiya Janata party, has criticised the government for poor economic management, saying it had left ordinary people to bear the burden of rising prices.

Oil imports are in the spotlight as India struggles to reduce foreign exchange spending. Earlier this week, the Reserve Bank of India announced plans to lend dollars to the country’s state-backed oil companies to bolster the currency.

And in a letter to the prime minister seen by Reuters, Marpadi Veerappa Moily, the minister for petroleum and natural gas, suggested the country could save $8.5bn in foreign currency expenditure if it sourced more oil from Iran, where payment is accepted in rupees.

Although petrol prices have been deregulated, New Delhi is still in the process of reeling in its expensive diesel subsidies, and losses at the country’s oil companies will affect the government’s fiscal deficit target of 4.8 per cent of gross domestic product in the current fiscal year.

Further fuel price rises are now widely expected. One analyst described a Rs5 per litre rise in diesel prices as a “done deal” once the current session of parliament ends, adding that attendants at gas stations in New Delhi were already telling customers to buy diesel this week to save money.

“My reading is that the policy establishment in Delhi and Mumbai has now decided to swallow the bitter policy medication rather than swing towards populism,” said Saurabh Mukherjea, head of equities at broker Ambit Capital.

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