The recent cuts in petrol and diesel rates may be reversed soon as rupee depreciated to a two-year low this week on fears of Chinese yuan devaluation.
Domestic oil companies have reduced the petrol and diesel prices by Rs 1.27/litre and Rs 1.17/litre respectively, announcing price cuts for the second time this month.
On 1 August, the price of petrol was cut by Rs 2.43/litre, while diesel price was lowered by Rs 3.60/litre. Fuel retailers review oil prices every fortnight.
Overall, prices of petrol and diesel were slashed by Rs 3.70/litre and Rs 4.77/litre respectively so far this month, as falling global crude oil prices have helped the fuel retailers to pass the benefits to the consumers.
Crude oil prices have fallen by over 23% since the beginning of June amid heightened worries over excess supply as major oil producing countries like Saudi Arabia remain reluctant to cut output fearing loss of market share.
Also, oil prices saw further decline this week as a result of yuan devaluation by Chinese authorities. The depreciating yuan led to heavy sell off in global financial markets, including commodities.
China's currency devaluation move also weighed on the Indian rupee and it fell to a two-year low this week following the move.
Even if crude oil prices remain lower, a depreciating rupee could limit the prospects of further fuel price cuts in the coming weeks, as it makes imports costlier.
"Since last price change, there has been a decrease in international prices of both petrol and diesel. The exchange rate has, however, depreciated during this period," said Indian Oil Corporation (IOC), the country's largest oil refiner.
The rupee weakened to Rs 65 against the US dollar, its lowest since September 2013. Analysts expect it to breach Rs 66 level in the near-term.
The government's import bill is estimated to rise by Rs 7,455 crore for every Rs 1 depreciation in the domestic exchange rate, according to the government body, Petroleum Planning and Analysis Cell (PPAC).
Even if Chinese yuan stops depreciating further, rupee may face another foe -- a strengthening US dollar. The dollar has been seeing a sustained appreciation due to growing expectations on interest rate hike by the US central bank in September.
A rate hike by the US Federal Reserve can lift the dollar value further higher, leading to a sharp depreciation in emerging market currencies like India.