India’s fuel austerity hit demand outlook, triggers 40% downward revision to annual product growth

India’s transport fuel outlook is increasingly being shaped by the government’s efforts to preserve fuel supply stability, contain foreign exchange pressures, and manage the growing financial burden on state-run oil marketing companies (OMCs) amid the ongoing US-Iran conflict. Rising crude import costs, rupee depreciation, and growing under-recoveries at state retailers have pushed policymakers to intensify fuel-conservation messaging and administrative austerity measures, which are expected to slow transportation fuel demand growth during the second half of 2026.

Key Takeaways:

• India 2026 refined products demand growth revised down by 77 KBD (39%) from 128 KBD previously to around 78 KBD as rising crude import costs, rupee weakness and government-led fuel conservation measures begin weighing on transportation fuel demand growth during 2H26.
• Gasoline demand faces the largest downside risk, with growth expected to undershoot previous expectations by approximately 5.3% during July-August and around 4% during September, equivalent to roughly 50 KBD, driven primarily by weaker commuting and discretionary mobility trends.
• Diesel demand is also expected to take a 20kbd downward hit to its annualized growth, while jet demand growth remains less in absolute terms, given its modest growth scale.

India's 2026 refined products demand growth forecast has now been revised down by approximately 77kbd (39%) from the previous estimate of 128kbd to around 78kbd. The revisions primarily reflect weaker expected growth in gasoline and diesel demand as higher costs, weaker mobility trends, and recent government-led fuel conservation efforts increasingly feed into domestic transportation activity.

Revisions to India’s annual transport fuel demand growth (kbd)

Source: Kpler

India’s macro backdrop has deteriorated since the escalation of the conflict. Higher crude import and refinery operating costs have intensified inflationary pressure, while the depreciation of the rupee has significantly amplified the local currency cost of imported oil. Headline inflation remained relatively contained in April 2026, rising to 3.48% from 3.40% in March, largely reflecting continued government efforts to shield consumers from higher global oil prices through controlled retail fuel pricing. Without these interventions, pass-through from crude and FX weakness would likely have been materially stronger.

The rupee has weakened roughly 6% since the start of the conflict and 10% over the past year. At the same time, FX reserves have reportedly fallen approximately 4.3% since late February as authorities attempt to stabilize the currency, contain imported inflation, and limit volatility in domestic fuel prices.

At the center of the issue is the growing financial stress facing India’s state-run fuel retailers. Retail fuel prices had remained largely frozen since 2022 despite materially higher crude procurement costs and a weaker domestic currency. Although gasoline and diesel prices increased by roughly ₹3/liter on 15 May and by less than ₹1/liter again this week, helping to modestly reduce OMC under-recoveries, the adjustments remain well below the estimated breakeven levels.

Current national average gasoline prices stand near ₹103/liter, while diesel averages approximately ₹92/liter following the recent hike. Roughly 55–60% of current retail prices still reflect underlying dealer transfer prices and freight costs, with the remainder largely comprising excise duties, VAT, and dealer commissions. Despite the adjustment, current pump prices remain materially below estimated economic breakeven levels.