Impact of diesel price reforms on asymmetricity of oil price pass-through to inflation: Indian perspective

Abstract

High-Speed Diesel is a dominantly consumed fuel and, therefore, a major channel through which oil shocks directly affects the Indian macroeconomy. To protect the households and the economy from volatilities of external oil shocks, prior to market-linking of prices in 2013, they were channelled in a controlled manner by managing domestic diesel prices. This intervention, however, introduced asymmetricities in oil shock passthrough. Utilizing the Non-Linear Autoregressive Distributed Lag model with the Augmented Phillips Curve framework, this study investigates the impact of diesel price deregulation reform on the asymmetric passthrough dynamics of oil shocks to sectorally disaggregated wholesale prices, retail diesel prices and aggregated consumer prices. The results reveal heterogeneous impact of reform across sectors. Broadly, it is found to have significantly reduced short and long-run asymmetricity of oil transmission, quickened propagation of oil shocks - especially of positive ones and reduced extent of passthrough. Moreover, the results exhibit a stronger preference towards passing oil hikes than declines to retail diesel prices in the long-run post-reform. On the aggregate consumer price, reduction in asymmetricity, increment in passthrough and no alteration to the speed of shock propagation has been observed.