Freeing Diesel Will Allow RBI to Cut Rates: India Ratings

Mumbai: The government's decision to free diesel prices will give more space to the Reserve Bank (RBI) to slash interest rates earlier than expected, and also help in improving the overall finances of the country, according to a report by India Ratings.

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," the rating agency said in its report.

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 - the 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 per 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."