"Undoubtedly, the government has shown strong resolve and has persisted with monthly hikes since January 2013," it said in an investor note.
The monthly diesel price hikes had led to under-recovery or loss on the fuel to fall to Rs 3.5 a litre in May but they again climbed to Rs 14.5 in mid-September on falling rupee that made imports costlier. Under-recovery on diesel currently stands at Rs 10.48 per litre.
"However, the Congress' weak performance at the recent assembly elections and high inflation (15-month high 7.52 per cent in November), may force the government to rethink on its monthly diesel hikes," it said.
Diesel under-recoveries remain high, and it is imperative for the government to maintain monthly diesel hikes, if not act on the measures recommended by the Kirit Parikh committee, Nomura said.
The government-appointed Kirit Parikh committee suggested hiking "immediately" prices of diesel by Rs 5 a litre, Rs 4 per litre in kerosene and Rs 250 per cylinder in LPG, reducing annual entitlement of subsidised cooking gas cylinder to six from nine and phasing out diesel subsidy in 1 year to cut a record subsidy burden.
State-owned fuel retailers currently lose about Rs 434 crore daily on the sale of diesel, PDS kerosene and domestic LPG at government controlled rates. Besides diesel, they lose Rs 36.20 on sale of kerosene through PDS and Rs 542.71 per 14.2-kg cylinder of domestic cooking gas (LPG).
"While the markets did not expect implementation of Kirit Parikh Committee recommendations, there are expectations that a nominal monthly 50 paise per litre hike on diesel will continue," it said. "But the risk is high that politics may prevail."
Any decision to stop monthly hikes will likely worsen sentiment, it added.
Oil Minister M Veerappa Moily had last week said that the monthly diesel price hikes will continue irrespective of the elections results.
Fuel retailers Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) lost Rs 60,907 crore on sale of diesel, LPG and kerosene in the first half of current fiscal.
The total under-recoveries on diesel and cooking fuel in full fiscal could be around Rs 147,500 crore.