How experts view fuel price hike and petrol de-regulation?

The much-awaited Empowered Group of Ministers (EGoM) meeting on Friday culminated in a number of sweeping changes on fuel prices including shift to market-driven prices for petrol. This would result in rise in prices of petrol by 6.7% (an increase of Rs 3.5/ltr). Diesel would also be de-regulated over time and prices have been raised by 5% (Rs 2/ltr) for now.



Prices of cooking fuels - LPG and kerosene - have been raised by 11.2% (Rs 35/cylinder) and 33.3% (Rs 3/ltr) respectively; but continue to remain administered.

Changes signal a move towards recommendations of the Kirit Parikh Committee and bode well for the fisc.

Given this adjustment, assuming current oil prices (USD 75/bbl), under-recoveries would reduce from nearly Rs 770 billion to Rs 530 billion.

Commenting on the impact on the inflation, Rohini Malkani, Economist, Citi India, said, ``Given that the impacted fuels have a weight of 5.44% in the WPI, measures would impact inflation by nearly 100 bps. This could result in inflation averaging around 8% levels in FY11 from 7.4% estimated earlier.``

``With the economy on the road to recovery, as reflected in industrial production gathering steam, non-oil imports and bank credit posting a recovery; coupled with inflation remaining sticky, we maintain our view of 75 bps of tightening in 2010. We expect the RBI to raise rates in the coming weeks``, she added.

Saurabh Handa, oil and gas analyst, Citi India believes that while under-recoveries on petrol, which comprise nearly 10% of total losses, would now be wiped out, oil marketing companies would continue to make losses on diesel, LPG and kerosene (see below for estimated losses).