Explained | What are oil bonds and how they once shielded India from fuel shocks

Oil prices are heating up again and are not far from the record highs seen in 2008. Brent crude, the global benchmark, nearly touched $120 per barrel on March 9, its highest level since the outbreak of the Russia–Ukraine War in 2022.Interestingly, the last time crude prices surged to historic highs, the government responded with a unique fiscal instrument — oil bonds — to cushion the impact of rising fuel costs and limit inflationary pressures.

Oil bonds are special government securities issued to state-owned oil marketing companies (OMCs) such as Indian Oil Corporation, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited as non-cash compensation for under-recoveries, or losses incurred from selling subsidised fuel below import costs.
Back in July 2008, oil prices surged to a record $147.50 per barrel as tight global supply-demand conditions coincided with a speculative surge in the futures market, against the backdrop of a weakening US dollar and mounting financial stress in the United States.At the time — before fuel prices were deregulated — petrol, diesel, cooking gas and kerosene were sold at subsidised rates under the United Progressive Alliance government. The difference between market prices and retail prices was borne by the government.

To manage this burden, the government issued oil bonds worth ₹1.34 lakh crore between FY2005 and FY2010. These bonds helped defer the fiscal impact, since paying subsidies in cash would have widened the fiscal deficit in those years.

However, repayments from these bonds have modestly constrained fiscal space for the current government led by the National Democratic Alliance. The bonds carry annual interest payments of about ₹9,000–10,000 crore, equivalent to roughly 0.2–0.3% of GDP, with principal repayments peaking at ₹52,860 crore in FY2025.

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Between FY2008 and FY2010, the three OMCs together were allotted bonds worth about ₹1.2 lakh crore, with Indian Oil Corporation alone subscribing to ₹66,480 crore.

Bond issuance to OMCs

(₹ crore)

Source: Budget documents

Overall, the ₹1.34 lakh crore of principal issued under the UPA-era oil bonds is projected to result in a total payout of around ₹2.6 lakh crore including interest by maturity in 2026. The bonds carried coupon rates ranging from 6.35% to 8.4%.

With fuel prices now deregulated, retail petrol and diesel prices in India have remained largely stable since May 2022, even as global crude prices have been volatile. Brent crude fell from about $124 per barrel in June 2022 to a low of $59 in December 2025, before the recent surge.

Despite the latest spike in crude prices, retail fuel prices are unlikely to be revised upward in the near term.

“Retail prices of petrol and diesel are unlikely to be raised despite the recent spike in global oil prices. Instead, oil marketing companies may absorb the impact through lower margins, which could lead to reduced profits,” sources told CNBC-TV18.

Analysts at UBS Global Research echoed a similar view, saying any potential retail fuel price hike or excise duty cut is likely to be small and staggered.

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However, India’s oil demand has nearly doubled since then to around 5.2–5.5 million barrels per day, with about 90% of its needs met through imports, making the country highly vulnerable to global oil price swings.