The Indian rupee has crashed to a record low of 96.20 against the US dollar, marking a significant escalation from previous levels. According to latest market reports, the domestic currency has weakened by around 5.5% since regional conflict intensified, with the rupee crossing the 96-per-dollar mark for the first time in history. The currency's decline has been driven by rising crude oil prices, which remain one of the biggest reasons behind the currency's fall. Brent crude surged to nearly USD 111 per barrel on Monday following reports of an attack on a nuclear power facility in the United Arab Emirates, further heightening fears of wider instability in the Gulf region. Market analysts warn that sustained pressure on the rupee could further increase inflationary risks in India, particularly by making fuel, imports and essential commodities more expensive for consumers and businesses.
Petrol and diesel prices increased by ₹3 per litre last week, marking the first fuel price hike in four years. According to reports from SBI Research Ecowrap, this adjustment comes amid ongoing Middle East conflict that has pushed global fuel prices higher and tightened energy supplies worldwide. The government on Monday confirmed that daily under-recoveries of state-run fuel retailers had fallen from around ₹1,000 crore to nearly ₹750 crore following the latest revision. However, petrol and diesel continue to be sold below cost-recovery levels, with under-recoveries still standing at roughly ₹10 per litre on petrol and ₹13 per litre on diesel, while cumulative losses since the start of the conflict could exceed ₹1 trillion by the end of May. As per SBI Research, the fuel price increase is expected to push inflation higher, with immediate impact on consumer price inflation likely around 15-20 basis points in May-June 2026.
Despite the price increase, SBI Research Ecowrap reports there is no direct impact of this hike on the fiscal situation. The research notes that historical data shows fuel consumption typically recovers quickly after price changes, with no visible decline in annual consumption levels. The report has revised its FY27 inflation forecast to 4.7% following this development, with the fuel price increase estimated to push up consumer price inflation by 15-20 basis points during May and June 2026. However, economists warn that elevated crude prices, weak rupee and persistent under-recoveries could force tougher policy choices if the West Asia crisis drags on. If current conditions persist, India's consumer inflation could rise towards 5.2 per cent in FY27, according to Crisil estimates, with recent fuel hikes potentially adding between 0.1 and 0.3 percentage points to consumer inflation. The outlook could improve significantly if India's average crude import basket moderates to around $95 per barrel or lower before the end of the first half of FY27.
The price adjustment provides significant relief to oil marketing companies facing substantial losses. According to SBI Research Ecowrap, OMCs are incurring losses of ₹1,000 crore per day, amounting to approximately ₹3.6 lakh crore annually. The current ₹3 increase in oil prices provides relief of ₹52,700 crore in under-recoveries, which represents 15% of the expected total losses of OMCs in FY27. However, analysts warn that the relief is far less meaningful under current conditions where the INR continues to weaken to fresh lows and India's average crude basket price remains persistently above $106 per barrel. Debopam Chaudhuri from Piramal Group noted that retail prices may need to rise by at least another 10 per cent for state-run fuel retailers to see any material improvement in profitability. The report warns that even an additional depreciation of ₹2 against the US dollar could substantially erode these intended benefits.
The government now faces a familiar but politically sensitive dilemma: allow higher fuel prices and risk inflation, or shield consumers and push the burden on to OMCs and public finances. Nilanjan Banik from Mahindra University said the government effectively has only three realistic options if under-recoveries continue to widen – further pump price increases, explicit fiscal support, or continued balance sheet absorption by OMCs. Debopam Chaudhuri argued that large-scale fiscal support to OMCs may not be the preferred approach given India's previous reliance on oil bonds during past crude shocks had left long-term fiscal scars. The current response marks a shift from blanket subsidy mechanisms toward more calibrated price pass-through and limited fiscal intervention. Rahul Ahluwalia from Foundation for Economic Development argued that the government should gradually allow fuel prices and the rupee to reflect underlying market realities instead of suppressing price signals, noting that people will find substitutes with smaller oil components when prices are high.
The potential excise duty reduction would significantly affect state government revenues as well. According to SBI Research, states could lose around ₹80,000 crore in gross revenue if Centre's excise duty is reduced to nil, keeping all else constant. However, higher oil prices would benefit states by around ₹30,000 crore, resulting in a net impact of around ₹50,000 crore on state revenue from an excise duty cut. The report emphasizes that while the current ₹3 price increase covers only 15% of state-run fuel retailers' expected losses this fiscal year, any further weakening of the rupee could substantially erode these gains. India has about 60 days worth of crude oil and liquefied natural gas reserves, alongside 45 days of liquefied petroleum gas stockpiles, according to Oil Minister Hardeep Puri. As per Hindustan Petroleum Corp. Chairman Vikas Kaushal, "We have not had any difficulty in getting the crudes which we want."
