Government decision to revise retail fuel prices daily is likely to result in improvement marketing margins for oil companies leading to better profitability, says a report.
In a report, India Ratings on Monday said the move, effective May 1 in select cities, is another positive structural change in the downstream sector after petrol price deregulation in 2010, diesel de-regulation in 2014, direct benefit transfer for LPG, give-it-up scheme for LPG, lowering PDS kerosene allocation and gradual hike in its prices.
This has resulted in lower under-recoveries which in turn has led to the state-run oil marketers' market borrowing to fall steeply. Between financial year (FY) 2013-2014 and 2015-2016, gross borrowing of state-run oil marketing companies (OMCs) fell by 29 per cent and interest cost has consequently declined by 37 per cent, it said.
A pilot for the daily price revision was launched in Puducherry, Vizag in Andhra, Udaipur in Rajasthan, Jamshedpur in Jharkhand and Chandigarh from May 1 and will be gradually extended to other parts of the country.
The report listed three reasons for possible increase in marketing margins for state-run IndianOil, Hindustan Petroleum and Bharat Petroleum: First this gives companies greater flexibility to pass on crude price volatility to the end-consumers; secondly it lowers the need for steep price hikes as in the fortnightly pricing regime thus lowering the possibility of political intervention; and lower chances for hoarding by dealers in anticipation of price hike.
Stating that the daily price revision is the best global practise, it said in the US, where the prices are revised daily, the maximum upward price change was 60 paisa/litre, while the maximum cut was 50 paisa/litre with a median change of around 1 paisa/litre in fiscal 2017. Against this back here the maximum hike in the year was Rs 3.38/litre, and maximum cut Rs 2.25/litre for petrol.