State-run oil marketing companies (OMCs) can now raise diesel prices in line with increases in global crude oil prices, Oil Minister Veerappa Moily said on Thursday, a move that could help the government reduce its vast subsidy bill.
"Oil marketing companies have been allowed to raise diesel prices in small quantities over a period of time," senior oil ministry official G. C. Chaturvedi said. He did not give details about the time-frame.
India cannot abruptly put an end to diesel subsidies, Oil Minister Veerappa Moily told television channel CNN-IBN.
India's policy to subsidise retail prices of fuels such as diesel, which accounts for about 40 per cent of refined fuel consumption, is a major drain on the budget.
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Diesel price decision not to reduce fuel subsidy bill: FM
India's budget-busting fuel subsidy bill for the current fiscal year ending in March is expected to remain unchanged even after a government decision to allow state-run oil companies to set diesel prices, Finance Minister P. Chidambaram said on Thursday.
“When they will make this small correction and how much, I can't say," he said. "So I am not factoring it."
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Ratings agencies threatened last year to strip India of its investment-grade credit rating if the government did not take steps to rein-in a widening fiscal deficit. Finance Minister P. Chidambaram has repeatedly vowed that the deficit will not exceed 5.3 per cent of GDP this financial year.
India imports more than 80 per cent of its fuel needs. The government liberalised petrol prices in June 2010, but has often prevented them from being raised to reflect rising oil prices on global markets.
Fuel consumption in India rose 5 per cent in the last fiscal year, its fastest since 2007-08.
Shares in oil marketing companies rose while bond yields fell after Moily's announcement.
The 10-year yield fell as much 3 basis points to 7.85 per cent.
Oil marketers surge on diesel price hike hopes
Shares in state-run oil marketing companies surge after the government allows them to set diesel prices, despite uncertainty about the specifics of the announcement.
Hindustan Petroleum Corp gains 8.9 per cent, after touching its highest level since October 2011, while Bharat Petroleum Corp gains 5.9 per cent, and Indian Oil Corp is up 7.8 per cent.
HPCL has gained 12.1 per cent in 2013, as of Wednesday's close, adding Rs 1,195 crore to its market cap.
"Worst time for refineries companies is by and by coming to an end. Refineries shares are quoting at ridiculous valuation," said Vijay Kedia, director at Kedia Securities, talking about their low valuations.
HPCL ends up 5.4 per cent, BPCL ends up 3.7 per cent, IOC ends up 6.4 per cent.