As oil traded near four-year lows, the government on Friday cut petrol and diesel prices by Rs 5 and Rs 2 a litre, respectively -- a move that will help tame inflation and foster easy money policy to push growth.
As an interim measure, the government has decided to cut the prices with effect from midnight tonight, Petroleum Minister Murli Deora said in New Delhi after a meeting with Prime Minister Manmohan Singh.
Although there is no change in the prices of LPG (cooking gas) and kerosene, the government would continue to watch international crude prices before effecting further cuts.
The government had in June raised the prices of petrol and diesel by Rs 5 and Rs 3 a litre, respectively, and that of LPG by Rs 50 a cylinder to protect oil marketing firms against losses on account of a rally in crude prices.
The hike had then propelled inflation to double digits and stayed so for five months. Inflation cooled to 8.40 per cent as of November 22, but is still above the Reserve Bank of India's tolerance level.
Crude oil subsequently climbed to a record high of $147 a barrel in July, but has now come to $43.5, a four-year low.
Today's decision will have a revenue implication of Rs 5,798 crore (Rs 57.98 billion) for oil marketing companies this fiscal.
Under-recoveries of OMCs as of today were calculated at Rs 98,512 crore (Rs 985.12 billion) and this will now increase to Rs 1,04,310 crore (Rs 1,043.10 billion).
Prior to the reduction, state-run oil firms were earning a profit of Rs 14.89 a litre on petrol and Rs 3.03 on a litre of diesel. However, they continue to sell kerosene at a loss of Rs 17.26 a litre and Rs 148.89 on every LPG cylinder.