In a much anticipated and awaited move, the UPA 2 government partially deregulated the diesel prices on Thursday. The Indian oil marketing companies (OMCs) will now be able to hike the prices of diesel periodically.
Minister of Oil Mr. Veerappa Moily has said the other day that the OMCs will now be able to cover the INR 9.60 loss they incur per litre of diesel sold. They are now allowed to raise the prices of diesel from time to time in small amounts, till losses are recovered.
The stock prices of fuel companies moved up on this news and it is learnt from analysts, that is indeed a positive move to recover losses. Till today, the subsidy of INR 9.60 on the diesel sale price had led to an yearly subsidy bill rising to INR 94,000 crore.
A leading market analysis company said that though this is only partial de-regulation, and full de-regulation is still some time away. However this move, of price increase, will also favour conditions, of which there is a high probability, to factor in complete de-regulation of the oil market.
An analyst also said that it expected Oil Majors like Oil India Ltd and ONGC to derive a lot of benefit from this move. During partial de-regulation, ONGC is expected to benefit more as any cut in prices of diesel, would mean lower risks on sale earnings.
The market was taken by complete surprise, as they were only expecting a measured move related to diesel. This announcement led to gains in OMC stock values on BSE, with Oil India and ONGC being big beneficiaries
The Government is also considering multiple options to reduce subsidies on LPG as well as kerosene. The markets, FIIs and other rating agencies are closely monitoring the fiscal deficit Vs GDP ratio targeted by the government. This move will boost the confidence of all, especially FIIs.
Overall , the following are some of the benefits derived from this move:
- The entire sector (oil and gas) would expect re-ratings and this will pay off well in the long run
- This might eventually lead to full price de-regulation, which in turn will benefit OMCs, especially ONGC
- Losses of INR 9.60 per litre will slowly be recovered and the OMCs will be able to cover loses and subsidies of over INR 94,000 crore per annum
- The market would see a balance in short and long terms approaches
- In the short term, we may expect a spike in inflation, however, in the long term, due to reduction of subsidy bills the fiscal deficit will be narrowed.
- Options will also be open for subsidy reduction on LPG and Kerosene.
- The move will boost investor (FIIs) confidence and also influence markets and rating agencies.
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