Fuel Price Hike to Boost India's Inflation by Up to 25 BPS

The increase in retail prices of petrol and diesel is expected to drive headline inflation print by 10-25 basis points (bps) in the coming months, with analysts cautioning that cascading impact of higher fuel costs could force RBI to reassess its inflation projections for the year.

Several companies, which were holding on to price hikes, are now expected to raise rates, citing higher transport and input costs.

Freight rates for goods transported by road are likely to rise by 2.5-3%, said All India Transporters Welfare Association (AITWA).

The transporters’ body said the industry has been facing cost pressure over the last few weeks as prices of Diesel Exhaust Fluid or urea used in BS-VI vehicles have shot up by more than 50%, while that of tyres, lubricants, toll charges, and several other inputs have also increased.

“…transporters are left with no option but to partially pass on the burden to customers,” said Ashok Goyal, national president of the association.

All India Motor Transport Congress’ former president Bal Malkit Singh said fuel price hike has further hurt the finances of the transport industry.

“Diesel alone contributes nearly 5055% of total truck operating costs, and with increases in fuel prices, tolls, insurance, tyres, maintenance and compliance expenses, transporters are struggling for survival. ”

The impact of the fuel price revision will start showing up in the May consumer price index (CPI) print, with full transmission likely from June onwards.

Most economists are revising the projections for the year.

IDFC First Bank chief economist Gaura Sengupta said today’s change in petrol and diesel prices will add 12 bps to headline CPI inflation, incorporating only the direct pass-through as May CPI inflation is estimated at 3.9%.

“We expect a cumulative rise of up to 10% in retail petrol and diesel prices (including today’s increase), spread over the next few months. Full-year FY27 CPI inflation is expected to average 4.9%,” she said.

Aditi Nayar, chief economist at ICRA Ratings expects the fuel price hike to push up the average retail inflation by 25 basis points (100 basis points equal a percentage point) on an annualised basis.

“We are now revising our forecast for May 2026 to 4.3% from 4.1%,” she said.

According to Radhika Rao, senior economist at DBS Bank, higher pump prices are likely to moderate demand and consequently the import burden.

“Given the weightage of petrol and diesel in the CPI basket, a 3-5% increase likely adds 15-25 bps to the headline print, besides second round impact,” she said.

Economists warn that the concern is not merely the direct impact of fuel inflation, but also the second-round effects taking place through transportation, logistics, manufactured goods and services.

Megha Arora, director at India Ratings & Research pointed to the additional pressure coming from rising milk prices, alongside fuel costs.

“The combined effect of petrol, diesel and milk price is likely to increase the CPI inflation by around 42 bps. The actual impact is likely to be higher via the fuel user industry like transportation and others. However, the impact in the month of May 2026 could be around 20bps,” she said.