Managing Diesel Under-Recovery Remains a Challenge - India Ratings

New Delhi, December 11, 2013: India Ratings & Research (Ind-Ra) expects gross under-recoveries (GURs) on petroleum products to remain high, driven by volatility in the rupee and crude oil prices. The agency does not expect the government of India (GoI) to undertake a steep hike in diesel prices although the state elections are over.

GURs would be guided by two main unpredictable external factors - the USD/INR exchange rate and international oil prices. In the current financial year, diesel GUR has varied from as high as INR14.5 per litre in mid-September to as low as INR3.5 per litre in May 2013and is currently at INR9.9 per litre.

According to Ind-Ra’s estimates, total GUR for FY14 could be around INR1,475bn, assuming the current daily GUR levels. This could lead to the GoI exceeding the budgeted INR650bn for the total subsidy burden in FY14.

To manage GURs, without enforcing a steep hike, the GoI would possibly have to raise the upstream share of the subsidy burden and increase the GUR burden on oil marketing companies (OMCs). Ind-Ra’s ratings on OMCs are based on the strategic importance of the sector to the sovereign.

(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research  A Fitch Group Company)