Skyrocketing fuel prices and the Indian economy

The government has increased the price of petrol and diesel respectively by Rs2 and Re1/litre. The increase will kick in less than 2 hours from now. Petrol in Bangalore will cost almost Rs53/litre, which probably makes it the most expensive in the country. In fact, fuel prices in India are among the highest in the world. With supplies not increasing at the same rate as demand, price increases are only natural.

But how long can this go on? In a country like India, where LPG is a major source of fuel for domestic cooking and freight is hauled either by diesel powered trucks or diesel locomotives hauling goods trains, an increase in diesel prices will have an impact on almost all other prices in the economy. In other words, inflation will increase. This will put upward pressure on interest rates, while fears of slowing domestic growth will cuase bankers to revise interest downwards to ease credit. Which of these forces will have a greater effect depends on their relative strength. And higher interests can only mean a relatively depressed stock market.

Either way, hold on tight folks, for an economic roller coaster ride!