State oil refiners cut petrol prices by Rs 1.85/litre from Wednesday, the first reduction in three years as well as since pricing controls ended 18 months ago, in a move that could help to ease inflation now near double digits.
Petrol prices will be Rs 1.85 a litre lower, excluding local taxes that vary regionally, and oil firm will now revise prices and pass on changes to customers fortnightly. The fuel will now cost Rs 2.22 cheaper at Rs 66.42/lt in Delhi.
The cut in prices comes after the government faced criticism when state firms -- Indian Oil Corp, Bharat Petroleum (BPCL) and Hindustan Petroleum -- raised petrol prices earlier this month, the sixth major rise since June 2010.
The price cut, implemented ahead of the next parliament session, could help improve the image of the ruling Congress party, with elections next year in Uttar Pradesh, a key state.
But oil firms said there had been no pressure to cut prices.
"The reduction has been possible as a result of favourable impact of the slide down both in the international prices of gasoline and in the Rupee/Dollar parity," oil companies said in a statement.
The rupee/dollar exchange rate came down marginally and was almost stable at around Rs 49.30 to a dollar in the first fortnight of this month, the basis for the current reduction.
"If the rupee/dollar parity remains at this level or moves further away, its impact would get reflected in the next pricing cycle," the statement said, referring to a falling rupee.
The rupee has been Asia's worst performing currency this year and continued to trade at its lowest level in nearly 32 months at 50.67/68 per dollar.
"If the Singapore gasoline prices maintain at this range or soften, there might not be any hike in retail prices. However, if rupee depreciates further, the companies may compensate that by going in for a small hike," said a leading Asian oil trader.
Fuel retailers usually meet once a fortnight to consider petrol prices but prefer to wait for a considerable change before passing any change to customers.
"From now on every fortnight we will change petrol price instead of waiting for a considerable build up in desired price. It could go up or go down but that will bring transparency in the system," said BPCL chairman R. K. Singh.
Such a step could reflect more accurately in the country's headline inflation, which has stayed above the 9 per cent mark for the eleventh straight month, in spite of 13 interest rate rises by the RBI over the past year and a half.
Petrol is nowhere near as widely used as diesel in India -- accounting for around 10 per cent of fuel demand compared with about 40 per cent for diesel -- but it is high-profile because it powers many of the cars owned by the growing middle class.
A reduction in petrol prices could give the government some respite as the fuel has 1.09 per cent weighting in the inflation index.
The widening price gap between the two fuels has slowed the growth of gasoline consumption, which has recently fallen behind that of diesel, which is subsidised by the government.
The Asian trader said the latest reduction in prices may not impact demand as the price gap between the two fuels has narrowed only marginally.
Profitability at state-run oil refiners has been hurt as the government has held back on raising prices of subsidised fuels -- diesel, kerosene, and cooking gas -- since June despite rising global crude oil prices.
The oil firms are likely to suffer a revenue loss of Rs 1.30 trillion on their sales of subsidised fuels in the current fiscal year ending March 31, 2012.
IOC said its revenue loss on the sale of a litre of diesel widened to Rs 10.17 from Rs 8.58 in the fortnight ended Tuesday as global prices of the fuel have firmed.