Fuel price hike impact: 'Rupee depreciation to trigger more FPI outflows'

India’s economic outlook has deteriorated sharply since February 28, when US and Israeli strikes on Iran triggered a global energy crisis. Brent crude surged above $100, disrupting India’s previously stable macroeconomic conditions—GDP growth of 7.6% for FY26, low inflation (2.75%), and comfortable forex reserves of $720 billion. The rupee has weakened due to heavy foreign portfolio investor (FPI) outflows, with net equity sales of ₹2.2 trillion by mid-May 2026, exacerbating a vicious cycle of depreciation and further outflows. The currency is now among the worst-performing emerging market currencies, while rising crude prices threaten to widen the current account deficit (CAD) and deplete forex reserves further. Inflationary pressures are mounting, with April’s consumer price index (CPI) at 3.48%, though still within the RBI’s tolerance band. However, fiscal challenges loom: the excise duty cut on petrol and diesel (₹10 per liter) will cost ₹1.5 trillion in revenue, while higher fertiliser subsidies and oil marketing company losses push the fiscal deficit toward 5% of GDP—above the budgeted 4.3%. This risks derailing post-COVID fiscal consolidation efforts. To curb fiscal strain, the government has begun staggered fuel price hikes—₹3 per liter for petrol and diesel, and ₹2 per kg for CNG—effective May 15. Oil marketing companies still need larger increases to break even, signaling further adjustments if crude prices remain elevated. Economists warn of a ‘live balance of payments stress test,’ with potential long-term impacts on the rupee, inflation, and private investment recovery.