Global rating agency, Fitch ratings in its latest report has said that the government directive to state-owned oil retailing firms to subsidise petrol and diesel would hit their profitability and credit metrics. It noted that the government reduced petrol and diesel prices by Rs 2.5 a litre, in response to rapid increases since the start of the year.
According to the report, excise duty on these fuels has been cut by Rs 1.50, but the state oil marketing companies (OMCs) have been directed to bear the cost of the additional Re 1 per litre. It also pointed out that fuel prices will continue to be adjusted daily depending on future market moves, but the margins earned by OMCs have effectively been narrowed, which amounts to an implicit subsidy for consumers. Adding further, it said that the fuel-price reduction also highlights the regulatory risks for Indian OMCs as a result of rising crude oil prices and the depreciating rupee. It added that the elections due in 2019 further increase the risk of price controls if crude oil prices continue to rise or the rupee weakens further.
The rating agency believes that any further reversal of these fuel-price reforms will be negative for the OMCs' financial profiles and could affect the investment climate in the sector. It informed that the government has also requested the state governments to cut local taxes to further reduce fuel prices. It added that rising crude prices and the depreciating currency are also increasing the working capital requirements of OMCs, driving up debt levels.