A cut in the policy rate could happen sooner than hitherto believed as the reduction in diesel prices will go a long way in fighting inflation, which is trending downwards, according India Ratings (Ind-Ra).

The cut in diesel prices by Rs. 3.56/litre, following lifting of diesel price controls, will create more space for the Reserve Bank of India to ease its policy stance, it added.

Prior to the reduction in diesel prices, market players were expecting the central bank to cut the policy rates sometime in the March-April 2015 period.

The Centre’s decision to deregulate diesel prices will significantly improve the country’s finances as the oil subsidy will come down by Rs 15,000 crore.

The credit rating agency observed that the staggered diesel price hike initiated since January 2013 and the recent decline in the prices of crude in the global market have converted the under-recovery of public sector oil marketing companies into an over-recovery.

However, India will have to be watchful of global developments. Crude prices and, therefore, petroleum product prices are currently low because of low demand and appreciation of the US dollar in relation to its trading partners (measured by the US dollar index), said Ind-Ra.

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

Although fuel price deregulation was scheduled to begin from April 2002, it took more than 12 years to deregulate petrol and diesel prices. The present order is, however, silent on Government intervention in the eventuality of global prices flaring up again, the agency said.

Currency movement (INR/USD) also has a significant impact on petroleum product prices and subsidy. Ind-Ra expects the rupee to strengthen marginally and this will have a favourable impact on both petroleum product prices and subsidy.

Related Topics
comment COMMENT NOW