Now, a cut in fuel prices

INFLATION AT A TWO-YEAR HIGH

The govt has made petrol cheaper by Rs 2 and diesel by Re 1 effective February 15 midnight.

The government took its fifth inflation-containment measure in a fortnight by announcing cuts in retail petrol prices by Rs 2 a litre and diesel by Re 1 a litre.

Following the reduction, effective February 15 midnight, the retail price of petrol in the national capital will be Rs 42.85 a litre and diesel, Rs 30.25 a litre. "The reduction will vary from state to state by a small margin on account of taxes," Petroleum Secretary MS Srinivasan said.

Faced with spiralling inflation, which touched 6.73 per cent for the week ended February 3, the government had earlier this month banned the export of skimmed milk powder and wheat to rein in their prices.

The Reserve Bank of India, on its part, raised the short term interest rate (repo rate) by 25 basis points on January 31 and followed it up with a 50-basis-point increase in the cash reserve ratio on Tuesday to suck out liquidity from the money market.

A part of the burden of losses from the price cuts will be recovered from a cut in excise duties, which is expected to be announced in the Budget, Petroleum Minister Murli Deora said. The government will also issue oil bonds to partially offset the burden. Upstream companies will also take a hit, he said.

Speaking to reporters, Deora said, "The decision to cut prices of petrol and diesel follows meetings with Soniaji and the prime minister yesterday."

In a statement later in the day, Finance Minister P Chidambaram said, "The decision to cut petrol and diesel prices has been taken after considering all facts and circumstances. Ordinarily, such cuts moderate inflation and I hope it will cut inflation."

The reduction in prices negates the Rs 4 and Rs 2 rise in prices of the two fuels in June 2006. In November 2006, prices had been cut by Rs 2 and Re 1 for petrol and diesel, respectively.

Oil marketing companies are expected to take an additional hit to their bottom-lines as a result of the differential between domestic sale prices and global crude oil prices.

At the beginning of the current financial year, the government had estimated that oil marketing companies would lose around Rs 73,000 crore by selling petroleum products below market prices. "The estimate now is that losses will not be above Rs 50,000 crore," Srinivasan said.

The government added that oil marketing companies were making a profit of Rs 2 a litre on petrol and a loss of Rs 1.30 a litre on diesel in the first fortnight of this month. After the price reduction, the marketing companies would record flat numbers on petrol and a Rs 2.30 a litre loss on diesel sales.

Although HPCL concurred with the petroleum secretary's statement, an official with Indian Oil, the country's largest oil marketing company, said the reduced prices would increase its daily under-recoveries from around Rs 40 crore to around Rs 48 crore.

On a day when the Bombay Stock Exchange rose 346 points, Indian Oil Corporation's share price dropped by 1.52 per cent. Bharat Petroleum and Hindustan Petroleum lost 1.40 per cent and 1.07 per cent, respectively.

Analysts, though wary that the price cut has come at a time when global crude oil prices are moving towards $60 a barrel, are hopeful that a duty cut will help offset some of the additional losses that oil marketing companies now have to bear.

The average price of the Indian crude oil basket in the first fortnight of February "� $ 56.2 a barrel "� was taken as the benchmark for slashing prices today. The Indian basket had hit a low of $49 a barrel on January 18, 2007. The average price of the basket stood at $56.8 a barrel the last time prices were cut.

In June last year, the Cabinet had cleared Rs 28,300 crore worth of oil bonds, of which Rs 19,150 crore of bonds have already been paid to the state-owned oil marketing companies.

"We still have a cushion of Rs 9,150 crore to work with," Srinivasan said. "Estimates are that we would not need more than Rs 5,500 crore of bonds in the remaining part of the financial year," he added.