Global Crude Oil Prices and Domestic Fuel Pricing
Indian Economy
- PYQs8
- Articles1
Background
Fundamental to understanding India's macroeconomic stability, energy security challenges, inflation dynamics, and the interplay between global events and domestic policy.
India is a major importer of crude oil, making its domestic fuel prices highly susceptible to fluctuations in international crude oil markets. The pricing mechanism for petrol, diesel, and LPG in India often reflects global benchmarks, though government intervention or subsidies can buffer the full pass-through of these changes to consumers.
Facts & tables
- India's Import Dependence
- Over 80% of India's crude oil needs are imported.
- Global Factors
- Geopolitical events, supply-demand dynamics, OPEC+ decisions, global economic growth.
- Domestic Impact
- Affects inflation, current account deficit, government revenue, and consumer spending.
- Pricing Mechanism
- Deregulation for petrol/diesel, but LPG pricing often involves subsidies.
| Type | Reference |
|---|---|
| Conceptual area | Indian Economy |
| Conceptual area | Energy Security |
| Body | Role |
|---|---|
| Oil Marketing Companies (OMCs) | Sets domestic prices |
| Reserve Bank of India (RBI) | Monitors inflation |
| Ministry of Finance | Manages fiscal impact |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Conceptual understanding
- India is a net crude oil importer.
- Global prices driven by supply, demand, geopolitics.
- Impacts domestic fuel prices, inflation.
- Affects current account deficit and rupee value.
- Government intervention can buffer consumer impact.
| Year | Framing tags |
|---|---|
| 2023 | Multi-statement analysis, Conceptual understanding |
| 2022 | Multi-statement analysis, Conceptual understanding |
| 2022 | Statement-based questions, Conceptual understanding |
| 2022 | Institutional roles and functions, Factual recall |
| 2020 | Multi-statement analysis, Conceptual understanding |
| 2015 | Statement-based questions, Factual recall |
| 2015 | Factual recall, Institutional roles and functions |
| 2013 | Conceptual understanding, Multi-statement analysis |
Timeline
-
Indian Economy
Conceptual area
-
Energy Security
Conceptual area
-
Prelims 2013
Conceptual understanding, Multi-statement analysis
-
Prelims 2015
Statement-based questions, Factual recall
-
Prelims 2015
Factual recall, Institutional roles and functions
-
Prelims 2020
Multi-statement analysis, Conceptual understanding
-
Prelims 2022
Multi-statement analysis, Conceptual understanding
-
Prelims 2022
Statement-based questions, Conceptual understanding
-
Prelims 2022
Institutional roles and functions, Factual recall
-
Prelims 2023
Multi-statement analysis, Conceptual understanding
-
Domestic LPG price hiked by ₹29 per 14.2-kg cylinder
Fluctuations in international crude oil prices significantly impact India's economy due to high import dependence, affecting domestic fuel prices, inflation, and the current account.
See also
Past papers
2013–2023 · 8 questions
In the news
Domestic LPG price hiked by ₹29 per 14.2-kg cylinder
Fluctuations in international crude oil prices significantly impact India's economy due to high import dependence, affecting domestic fuel prices, inflation, and the current account.
Try these PYQs
Consider the following statements:
1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
Statement 1 is correct. As per the data given in the Economic Survey 2019-2020, the weightage of food in the Consumer Price Index (CPI) Combined is 45.9% as compared to 24.4% in Wholesale Price Index (WPI). Statement 2 is correct. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation, whereas WPI does not measure the average change in prices. Statement 3 is incorrect. In April 2014, the RBI adopted the Consumer Price Index (CPI) as its key measure of inflation. Hence, option A is the correct answer.
With reference to the Indian economy, consider the following statements:
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct?
* Statement 1 is correct. The nominal Effective Exchange Rate (NEER) is a measure of the value of a country's currency against a basket of other currencies weighted by their importance in trade. If NEER increases, it means that the value of the currency has increased relative to the currencies in the basket, indicating appreciation. * Statement 2 is incorrect. The Real Effective Exchange Rate (REER) takes into account both nominal exchange rates and relative price levels (inflation) between countries. An increase in REER means that the country's currency is overvalued relative to its trading partners, which can reduce trade competitiveness. * Statement 3 is correct. If domestic inflation is higher than inflation in other countries, the real value of the domestic currency decreases faster than the nominal value, causing a divergence between NEER and REER. Therefore, the correct statements are 1 and 3.
A rise in the general level of prices may be caused by:
1. an increase in the money supply
2. a decrease in the aggregate level of output
3. an increase in the effective demand
Select the correct answer using the codes given below.
Statement 1 is correct: According to the quantity theory of money, if the money supply increases faster than output, it leads to more money chasing the same amount of goods, causing inflation. Statement 2 is correct: When output decreases but demand remains the same, there is excess demand relative to supply, which can push prices up (cost-push inflation). Statement 3 is correct: Effective demand refers to the total demand for goods and services at a given price level. If it increases beyond the economy's productive capacity, it causes demand-pull inflation.
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
The responsibility for maintaining price stability and controlling inflation in India lies primarily with the Reserve Bank of India (RBI). The RBI formulates and implements monetary policy to maintain price stability and ensure adequate flow of credit to productive sectors of the economy. As the central bank of the country, the RBI uses various tools such as repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) to influence liquidity and interest rates in the economy, thereby affecting inflationary pressures.
With reference to the Indian economy, consider the following statements:
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given below is/are correct?
Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further. Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee. Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.
Show 3 more PYQs
With reference to the India economy, consider the following statements:
1. The rate of growth of real Gross Domestic Product has steadily increased in the last decade.
2. The Gross Domestic Product at market prices (in rupees) has steadily increased in the last decade
Which of the statements given above is/are correct?
Statement 1 is incorrect: The rate of growth of real Gross Domestic Product has fluctuated over the decade. Statement 2 is correct: The Gross Domestic Product at market prices (in rupees) has steadily increased in the last decade. Thus, statement 1 is incorrect while statement 2 is correct.
Correct the following statements:
Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
Which one of the following is correct in respect of the above statements?
* Statement I- correct: In the aftermath of the COVID-19 pandemic, many central banks around the world observed rising inflation. To combat this inflation, they resorted to raising interest rates. This is a well-established monetary policy tool to curb inflation by making borrowing more expensive and encouraging saving, thereby reducing the money supply in circulation. * Statement II- correct: Central banks are entrusted with maintaining price stability and managing inflation. Raising interest rates is one of the primary instruments they use to achieve this objective. While other factors can influence inflation, central banks do have the ability to significantly impact it through monetary policy measures. Therefore, both statements accurately reflect the role of central banks and their use of interest rates to manage inflation and statement 2 is the correct explanation for statement 1.
Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers’?
The Labour Bureau, attached to the Ministry of Labour and Employment, is responsible for compiling and publishing the Consumer Price Index Number for Industrial Workers (CPI-IW) in India. This index tracks changes in the retail prices of a basket of goods and services consumed by industrial workers. It serves as a crucial indicator of inflation faced by this specific segment of the population. The Labour Bureau is responsible for maintaining:
- CPI (Industrial Workers) - CPI (Rural Labourers) - CPI (Agricultural Labourers)