COIMBATORE (TIP): The Union government’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, India Ratings & Research has said. The cut in diesel prices by Rs 3.56 per litre will go a long way in fighting inflation, which is trending downwards, it said. “This will create more space for the Reserve Bank of India ( RBI) to ease its policy stance and cut policy rate sooner than hitherto believed,” the agency stated.

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 overrecovery. The over-recovery on diesel for such companies reached Rs 3.56 per liter for the second fortnight of October. The crude price of the Indian basket as on October 15 fell to $83.85 per barrel and the rupee was at 61.1 to the US dollar.

When diesel prices were increased by around Rs 5 per liter on September 14, 2012, the Indian crude oil basket was priced at $113.64 per barrel and the rupee was at 55.47, leading to an underrecovery of Rs 13.86 per liter. Though the rupee depreciated to around 61.5 by the middle of October 2014 from around 59 in May/June 2014, the sharp fall in the global crude prices has overall lowered the import price of Indian basket considerably. “As the crude prices in the global market are likely to remain low in the near-term due to the discovery of shale oil in US and also (because of) the struggling economies of Europe and Asia, deregulating diesel prices is both the right and opportune step,” India Ratings stated.

However, India will have to be watchful of global developments, it said. “Crude prices are currently low because of low demand and appreciation of the US dollar in relation to its trading partners,” the agency said. If global oil and petroleum products demand and supply remain same, depreciation of the dollar may flare up both crude and product prices, India Ratings, which is part of the Fitch Group, cautioned. “Although the fuel price deregulation was scheduled to begin from April 2002, it took more than 12 years to deregulate petrol and diesel prices,” it pointed out.