A cut in policy rates could happen sooner than hitherto believed as the cut 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 ₹3.56/litre will create more space for the RBI to ease its policy stance. Prior to the deregulation in diesel prices, market players were expecting the RBI to cut policy rates in March-April 2015.

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

Ind-Ra said 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 (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.

Intervention 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. The credit rating agency expects the rupee to strengthen marginally, and this will have a favourable impact on both petroleum product prices and subsidy.

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