Oil Marketing Companies (OMCs) increased the retail price of subsidised diesel by 50 paise a litre on Aug. 30, 2014 in line with the past trend, which started in January 2013 when the government of India (GoI) had decided to increase diesel prices in small doses every month. On the same day, the bulk diesel prices, which are market-linked have been reduced by Rs. 1.3 per litre.
ICRA Research notes the current under-recovery on subsidised diesel has become almost nil (at 8 paisa a litre) post the recent increase, based on previous pricing fortnight level of crude oil prices and foreign exchange rate. The fall in market-linked diesel prices follow the recent softening in crude oil prices along with appreciation in INR against USD over the last one month.
ICRA Research had earlier projected the gross under-recoveries (GURs) to decrease to around Rs 1,000 billion for FY15 from Rs 1,399 billion for FY14 considering average Indian basket crude oil price of USD 108/bbl, INR-USD rate of 59.5, and Rs 0.5/litre monthly rise in retail diesel prices. If the softened crude oil prices sustain for the rest of FY15, the fall in under-recoveries could be sharper to around Rs 900 billion for FY15 (estimated at Indian Basket crude oil price of USD 101/bbl and INR/USD of 60.5).
The under-recoveries on diesel are expected to reduce to almost one-fourth to Rs 150 billion in FY15 from Rs 628 billion in FY14. The fall in gross under-recovery should lead to decrease in short-term debt levels and interest cost of OMCs; thereby resulting in improvement in their liquidity position. Besides, the fall in under-recoveries could also lead to decrease in the subsidy burden of the GoI as the government may retain large part of benefits of lower under-recoveries in order to meet its aggressive fiscal deficit reduction target for FY 15.
Overall, ICRA is of the opinion that a decision on diesel price deregulation could potentially be a credit positive for the domestic petroleum sector, which could send positive signals to the capital market investors. Moreover, deregulation could stimulate the entry of private sector into retailing of auto fuels, thereby infusing the much needed competition in the sector.
