Are markets pricing in fuel-driven inflation?

After an increase of Rs 25 per liter in diesel prices for wholesale buyers over the weekend, the government raised the prices of petrol and diesel by 80 baisas per liter each.

Domestic cooking gas or LPG prices were increased by Rs 50 per cylinder, ending a four-and-a-half month election-related gap in price review amid rising crude oil prices.

The government has kept auto fuel prices unchanged since November 2021 despite Russia’s war with Ukraine that pushed crude oil prices to a 14-year high of more than $140 a barrel. Retail gasoline and diesel prices have been frozen since October 2021 when crude oil prices were hovering around $80 a barrel.

Analysts expected a sharp rise in petrol and diesel prices around March 10 when poll results were announced in five major states of Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur.

G Chokkalingam of Equinomics Research, for example, said raising bulk diesel prices is relatively less inflationary than rising retail prices for gasoline and diesel.

“The market was expecting a sharper rise across the board, especially after knowing the result of the statewide survey; and in light of the Russo-Ukrainian war and its impact on crude oil prices,” says Chukalingam, founder and chief information officer at Equinomics Research.

Let’s now turn to Ambareesh Baliga, an independent market analyst, to understand how he interpreted the development and its potential impact on the markets.

Analysts believe that inflation will trend higher amid higher oil prices as the solution to the current geopolitical crisis is not in sight yet.

Nomura’s Sonal Varma expects retail inflation to average 6.3 percent year-over-year in 2022, with core inflation likely to trend above 6.5 percent throughout most of the year.

Ik Prabhakar of IDBI Capital also believes that the markets are yet to fully determine the impact of higher fuel prices on inflation. Let’s listen to what he said.

With no major economic releases in India during the week, markets are likely to remain range bound. The specified stock will continue to function.

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