Finance Minister Arun Jaitely said the Cabinet in its meeting today decided to deregulate or free diesel prices. Retail rates will now reflect international movement in oil prices.
As a result, rates will be cut by Rs 3.37 a litre with effect from midnight tonight.
This is the first reduction in diesel rates in over five years. Diesel rates were last cut on January 29, 2009 when they were reduced by Rs 2 a litre to Rs 30.86. Diesel prices were last raised by 50 paisa on September 1 and cumulatively risen by Rs 11.81 per litre in 19 instalments since January 2013.
There couldn't have been more opportune time for the decision. Oil prices are near a four-year low and two major state elections are out of the way.
Reserve Bank Governor Raghuram Rajan has recently called on the government to "seize this moment", while inflation is the lowest in five years and refiners are selling at a profit for the first time ever. Brent crude has fallen 25 per cent this year to around USD 83 per barrel and expectation is that it may not cross USD 100 barrel anytime soon.
The process was set in motion by the previous UPA government when it eliminated controls on petrol prices in 2010 and in January last year decided to raise diesel prices by up to 50 paisa a litre every month.
The result has been that petrol prices have moved in tandem with global cost and retail rates being reduced on five occasions since August on falling oil rates. Prices have cumulative come down by close to Rs 7 per litre in last two-and-half months.
On diesel, the entire under-recovery or loss has been eliminated and oil firms started making profit from second half of September. The over-recovery or profit has sincereached Rs 3.56 per litre.
Deregulation would mean that the government and state-owned explorers including Oil and Natural Gas Corp (ONGC) are no longer subsidising diesel.
Finance Minister Arun Jaitley had budgeted Rs 63,400 crore for petroleum subsidies which was 25 per cent lower than previous fiscal. But unlike past, the subsidy bill is unlikely to overshoot the budgeted amount due to fall in oil rates.