How Much Will Inflation Rise Due to the ₹3 Hike in Petrol and Diesel Prices? Get the Full Breakdown from the SBI Report

SBI Research Report: Will the ₹3 hike in petrol and diesel prices lead to a decline in the country's fuel consumption? Delve into the full analysis presented in the SBI Research Report. Discover the potential impact of this move on the common citizen, the inflation rate, and the government exchequer.

SBI Research Report: Recently, the prices of petrol and diesel in the country were hiked by ₹3 per liter. This step became necessary because the prices of crude oil (Brent Crude) in the international market were rising continuously; however, retail prices in India had not been revised for quite some time, resulting in heavy losses for Oil Marketing Companies (OMCs).

Now, the research team at SBI—the country's largest bank—has analyzed in its 'Ecowrap' report the potential impact of this ₹3 hike on the common citizen's wallet, inflation, and the nation's fiscal situation.

What Will Be the Impact on Inflation? (CPI Inflation)

According to the report, this ₹3 hike will have an immediate impact on the retail inflation rate (CPI Inflation). An increase of 0.15% to 0.20% (15–20 basis points) in inflation is likely to be observed during the months of May and June 2026. In light of this anticipated impact, SBI Research has revised its forecast for India's average inflation rate for the entire financial year 2026–27 (FY27) to 4.7%.

Will Fuel Consumption Decline?

It is commonly believed that when fuel prices rise, people tend to drive less, leading to a decline in consumption. However, the SBI report presents an interesting insight derived from an examination of historical data. Whenever fuel prices increase, there is indeed a slight dip in consumption during the initial few days or weeks. Yet, the public very quickly adapts to this change, and consumption subsequently returns to its previous levels. On an annual basis, no overall decline in the country's total fuel consumption is recorded.

Oil Companies' 'Massive Losses' and a Modest Relief of ₹3

Citing a Union Minister, a report states that due to the freeze on price hikes, state-run oil companies (IOC, BPCL, HPCL) were incurring massive daily losses of approximately ₹1,000 crore—amounting to ₹3.6 lakh crore on an annual basis. The recent price hike of ₹3 per liter is expected to provide the oil companies with a relief of ₹52,700 crore against their total projected losses for the fiscal year 2027. However, this relief constitutes merely 15 percent of the companies' total annual losses.

What Would Happen If the Government Reduced Taxes to 'Zero'?

The public frequently demands that the government completely abolish the excise duty levied on petrol and diesel. SBI has provided a detailed breakdown of the financial implications of such a move. Currently, an excise duty of 11.9% is applicable to petrol, and 7.8% to diesel. If the government were to reduce this to zero (Nil), it would result in a revenue loss of ₹1.9 lakh crore for the government (meaning this amount would instead accrue to the oil companies or the public).

Unless the government simultaneously cuts down on its other expenditures, this tax exemption could cause the country's fiscal deficit to widen by up to 0.5% of the GDP. Furthermore, if the Central Government were to eliminate the excise duty, the states would also face a loss of ₹80,000 crore in their share of tax revenues. However, given that the states are simultaneously benefiting by ₹30,000 crore due to high international oil prices, the net loss incurred by the states would effectively amount to ₹50,000 crore.