Freeing diesel will allow RBI to cut rates: Report

October 20, 2014 05:51 pm | Updated December 04, 2021 11:23 pm IST - Mumbai

A file picture of a petrol bunk in Chennai. Photo: M. Karunakaran.

A file picture of a petrol bunk in Chennai. Photo: M. Karunakaran.

The government decision to free diesel prices will give more space to the Reserve Bank to slash interest rates earlier-than-expected, and also help in improving the overall finances of the country, says a report.

The government last Saturday deregulated diesel prices which resulted in a Rs 3.37 a litre cut in retail rate of India’s most consumed fuel.

“The deregulation of diesel prices will significantly improve the country’s finances as oil subsidy will come down by Rs 15,000 crore,” said the report by India Ratings.

The retail price cut will go a long way in fighting inflation, which is trending downwards, it said. “This will create more space for the Reserve Bank to ease its policy stance and cut policy rate sooner than expected.”

The staggered diesel price hike initiated since September 2012 and the recent drop in crude prices in global markets have converted under-recovery (difference between retail price and its imported cost) of public sector oil marketing companies into an over-recovery (profit).

The over-recovery on diesel for such companies reached Rs 3.56 a litre for the first fortnight of October.

The crude price of the Indian basket as on October 15 fell to $ 83.85 a barrel and the rupee was at Rs 61.1 against the dollar.

When diesel prices were increased by around Rs 5 a litre on September 14, 2012, the Indian basket was priced at $ 113.64 a barrel and the local currency was at Rs 55.47 to a dollar, leading to an under-recovery of Rs 13.86/litre.

Although the rupee depreciated to around 61.5 by the middle of October 2014 from around 59 vs dollar in May/June 2014, the sharp fall in global crude prices has overall lowered import price of India’s basket considerably.

“As the crude prices in global market are likely to remain low in the near term due to the US’ discovery of shale oil as also the struggling economies of Europe and Asia, deregulating diesel prices is both the right and opportune step,” the rating agency said.

The rating outfit, however, said India will have to be watchful of global developments as the current fall in crude and petroleum product prices are due to low demand and rise of the dollar in relation to its trading partners.

“In a scenario, where even if global oil and petroleum products demand and supply remain same, depreciation of the US dollar may flare up both crude and product prices.”

Top News Today

Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.