State-run Indian oil marketing companies can now raise diesel prices in line with increases in global crude oil prices, Oil Minister Veerappa Moily said on Thursday, a move that could help the government reduce its vast subsidy bill.
Here is what the experts have to say:
Vivek Rajpal, Nomura, Mumbai
"Given oil companies still need to take the approval from government authorities, I am not too excited about this news. Though the first market reaction is positive, I really doubt the sustainability of such a reaction based on this news, especially once markets take a look at details."
Rupe Rege Nitsure, Bank of Baroda, Mumbai
"It's better to make step-wise adjustments rather than a one-off large scale adjustment. Earlier, when petrol prices were de-regulated, they hardly responded to market forces. Today's announcement will depend on how frequently and how genuinely OMCs respond to market forces."
Anoop Verma, Development Credit Bank, Mumbai
"It is a positive sign. Everyone is however little sceptical about how fast or will it be implemented. The government is the owner of these companies and will always have a say in the pricing. Bonds markets went higher initially but prices gave up some gains later on this scepticism."
Anand Mahindra, Mahindra & Mahindra (on Twitter)
"If the minister's statement re oil cos flexibility to tweak diesel prices is the 1st step to price decontrol, then it's a bold & overdue step."
Paras Adenwala, Capital Portfolio Advisors, Mumbai
"The announcement would be productive if in reality OMC would have freedom to raise price in line with international prices.
"This is conditional, we need to understand what is small quantity and what is over a period of time. Do companies really have the freedom to raise prices, or is it again government calling the shots?"
Gautam Singh, Anand Rathi Securities, Mumbai
"Even a Re 1 hike in diesel will lead to an Rs 8,000 crore reduction in subsidy. So, even a Rs 10 hike over a period of time, can have a Rs 40,000-45,000 crore impact on the fiscal deficit.
"However, it seems difficult to implement given that the government will face general elections in a year and half."
Shubhada Rao, YES Bank, Mumbai
"The prevailing thought is there is certainly a sense of inevitability considering the huge subsidy burden and the need to maintain the fiscal deficit to GDP ratio at 5.3%. In that context, there is inevitability of upward price adjustment in petroleum prices. The magnitude and the timing will be worked out between the government and the OMCs. However, we await clarity."
A Prasanna, ICICI Securities, Primary Dealership Ltd, Mumbai
"It's kind of ambiguous. But if they're able to push through the increases over a course of six to seven months, it will improve the prospects for next year's fiscal deficit. However, it will be inflationary.
"This kind of signals there will be regular increases. It will push up inflation expectations, and will lead to second round effects."