How Depreciating Rupee Will Increase Petrol Prices

It is widely expected that the price of petrol in India will come down. This is because the price of crude has fallen to around $80 per barrel levels. However, the oil companies are not reducing the price. In fact a pricing meeting slated for June 15th did not take place. Since then there is no mention of petrol prices coming down. Why petrol prices will never fall in India even as crude prices are falling?

Why is this so?

It is because the rupee is continously depreciating against the dollar, almost on a daily basis. It seems there are some forces

which want the rupee to go to lower and lower levels and thus the benefits of a depreciating rupee are being denied to the Indian public.

Now, crude oil was priced at around $ 100 a barell till some time back, when the dollar was fetching around 45 rupees. Thus, it required Rs 4500 to import a barell of oil. Now, the same barell costs $ 80 but the dollar is available for 57 rupees.  Thus, a barell will now come at a price of Rs 4560, which is equal to or slightly higher than when dollar and petrol were both costler than today. So the demand for dollars by the oil companies has gone down by about 20 %  per barell but the rupees needed to buy the reduced dollars has gone up by about 27 %. So how can the petrol prices come down.

In fact, there are very good chances, that the prices may go up, if the rupee keeps sliding against the dollar. Today the

rupee is very close to breaking the 57 to the dollar mark.

It is clear that the government and RBI are not able to control the rupee's fall. The person who was to control and give fiscal directions to the country's economy, is going to Rashtrapati Bhawan and need not incurr petrol expenses hereafter.

The RBI is not able to control inflation. The government is not able to increase the supply side to balance the increase in demand a major cause of inflation. The UPA government  has, it seems, decided to float, till the 2014 elections and no significant policy initiatives or decisions will be taken. The NDA and BJP are busy deciding, who will be their candidate, for the next PM, if they come to power in 2014. There is a total lack of will in the political class to arrest the fall of the rupee.

Both the Central and State governments are not too keen to reduce the petrol prices or control the slide of the rupee. This is because as the ex-refinery price of petrol goes up, they earn exrtra revenue from the taxes and duties levied ad valorem basis on crude and petrol. Easy money one would say. 

Thus the price of petrol is not going to come down in India, even if crude prices keep falling, because some unknown factors seem to conspire, to simultaneously depreciate the rupee's value against the dollar. What are these factors, can any one enlighten the country especially its policy makers.

Article Written By vks1000

Am a retired professional who is now into education of International Business and management topics. I enjoy writing and like reading on politics,economics,management and films. I take life as it comes and try to keep myself busy with a variety of activities.

Posted on 21-06-2012 38 0

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