The newly introduced mechanism of daily fuel price revision will help boost marketing margins and profitability of India’s state-run oil marketing companies (OMCs), India Ratings and Research said in a research report. This step is the latest in a long list of structural changes which include deregulation of petrol prices in 2010, deregulation of diesel prices in 2014, direct benefit transfer for LPG, give-it-up scheme for LPG, lowering the allocation of PDS kerosene, hike in prices of kerosene, all of which have helped the OMCs to reduce their short-term borrowings and consequently the interest burden substantially, the report said.
The OMC’s will be free to change the prices of petrol and diesel on a daily basis, in-line with global best practices as against the current fortnightly price revision. In the current regime, the OMCs revise the rates on the 1 and the 16 of every month, based on the average price of crude and the exchange rate in the preceding 15 days.
Daily fuel price revision, know as Dynamic Fuel Pricing, will allow greater flexibility to OMCs to pass on the crude price volatility to the end-consumers at a higher frequency, lower hoarding by the dealers in anticipation of price rises and lower the need for steep price hikes that happen in the current fortnightly pricing regime and thus lower the possibility of a political intervention, the report added.
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India’s state-run oil marketing companies – Indian Oil Corp, Bharat Petroleum Corp and Hindustan Petroleum Corp – have rolled out this plan on a pilot run basis from May 1 in the cities of Puducherry and Vizag in Southern India, Udaipur in the West, Jamshedpur in the East and Chandigarh in the North.
These three companies together control the bulk of the fuel retail market with over 90% of the operational outlets between them and hence practically set the benchmarks in fuel pricing. This move will also allow private fuel marketers Reliance Industries and Essar Oil, who have most of the remaining market and currently follow the price set by state-owned companies, to also shift to a dynamic model.