If rupee continues to strengthen and monthly price hikes of up to 50 paisa a litre are allowed, diesel prices will be decontrolled by September.
An official statement said the difference between the cost of diesel production and the retail selling price has narrowed to Rs 1.62 a litre from Rs 2.80 in the first fortnight of June.
While the Narendra Modi-government has continued with the UPA government's decision of eliminating subsidy through small does of monthly price increases, international oil rates had also softened in the first fortnight of June as compared to second half of May.
Diesel prices were last hiked on June 1. Rates have cumulatively risen by Rs 10.12 a litre in 16 instalments since January 2013 when the UPA government had decided on small monthly hikes.
When Modi government came to power last month, losses on diesel sales stood at Rs 4.41 a litre.
Petrol price was deregulated in June 2010 and has moved more or less in tandem with the cost.
The UPA government had in January, 2013 decided to raise diesel prices in small doses of 40-50 paisa a litre every month till the losses, which are made good through government subsidy, are completely eliminated.
Officials said the monthly increases had trimmed losses to less than Rs 3 a litre in May last year before a fall in rupee value led to losses on diesel sale widening to Rs 14.50 per litre in September, 2013.
Since then, monthly increases have continued and the rupee has strengthened.
The losses have fallen rapidly since March as the prospect of a stable and decisive government under Modi helped rupee gain against dollar. Losses on diesel stood at Rs 8.37 per litre in March.
Besides diesel, the oil firms are at present Rs 32.87 a litre on kerosene and Rs 432.71 on LPG, the statement said.
"Oil Marketing Companies (OMCs) are now incurring combined daily under-recovery (revenue loss) of about Rs 249 crore on the sale of diesel, PDS kerosene and domestic LPG. This is less than Rs 262 crore daily under-recoveries during previous fortnight," it said.
The under-recoveries for the financial year 2014-15 are projected to be Rs 91,665 crore as opposed to Rs 1,39,869 in the 2013-14.