Fuel price adjustment needed to curb demand: RBI

"...In the absence of pass-through from international crude oil prices to domestic prices, the consumption of petroleum products remains strong distorting price signals and preventing the much-needed adjustment in aggregate demand," RBI said in its mid-quarter monetary policy review.

The consequent subsidy burden on the government, it said, "is crowding out public investment at a time when reviving investment, both public and private, is a critical imperative".

The central bank also pointed out that though international crude prices have fallen significantly from their levels in April 2012, the rupee depreciation has significantly offset its impact on wholesale prices.

Further, RBI said that even at the current lower level of global crude oil prices, significant under-recoveries persist in respect of administered petroleum product prices.

Oil marketing companies (OMCs), at present, (effective June 1, 2012) are incurring daily under-recovery of about Rs 457 crore on the sale of diesel, kerosene and LPG.

The rupee has depreciated by about 20 per cent against the US dollar over the past one year.

While OMCs are free to decide on petrol prices, the government continues to regulate prices of diesel, LPG and kerosene, which are being sold at subsidised rates.

Diesel is the most consumed fuel in the country but is sold at a discount to its imported cost. The current diesel subsidy is Rs 12.53 per litre and on an annualised basis, this amounts to Rs 1 lakh crore out of the total fuel subsidy, estimated at Rs 1,78,498 crore in the current fiscal.