Understanding Why Petrol prices could rise in India despite fall in global prices?

First the good news! International Crude Prices have been coming down.

And then the bad news! The price of both petrol and diesel is likely to rise despite falling international prices. Sounds weird. Isn't it? In fact seems a bit too unfair.

This can be true because the price that we pay for petrol depends on two factors International Prices Value of the Rupee

The first factor is easy to explain The first factor is easy to explain. Higher international prices means higher local prices. Similarly lower international prices means lower local prices. It’s a simple and direct relationship.

However, the second factor which is about higher local prices because of weakening currency is what I thought would be good to explain.

Let’s assume the price of Petrol is $100 per unit and the exchange rate is Rs. 50 per Dollar. Then the cost of Petrol in rupees would be = 50 x 100 = Rs. 5000. Now, assume that the exchange rate changes to Rs. 60 per dollar. Now although the price of Petrol in the international market continues to be $ 100 per unit, but because of the change in exchange rate, the cost for India for a unit of Petrol goes up from Rs. 5000 to Rs. 6000 (60 x 100 = Rs. 6000).

That is a 20% increase in price (Rs. 6000- Rs. 5000/Rs That is a 20% increase in price (Rs. 6000- Rs. 5000/Rs. 5000) x 100 despite no change in International Prices.

Even if the price of Petrol were to reduce to $95 per unit, it would cost India Rs. 60 x 95 = Rs. 5700 which is more than what India was paying when Petrol cost $100 at Rs. 50 per dollar exchange rate.

Thus it is possible for us to pay more for Petrol even if the International Price of Petrol were to come down. This is because of currency weakening (rupee vis a vis the dollar) at a rate faster than the fall in International price of Petrol.

Hope this story has clarified the Why Price of Petrol could rise in India even if International Price of Petrol were to reduce. Please give us your feedback at professor@tataamc.com

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