A Fitch Group company India Ratings & Research expects gross under-recoveries (GURs) on petroleum products to remain high, driven by volatility in rupee and crude oil prices.

The agency does not expect the Government to undertake a steep hike in diesel prices although the state elections are over.

Key external factors

According to its latest report, GURs would be guided by two main external factors — the dollar and rupee exchange rate and international oil prices.

In the current financial year, diesel GUR has varied from as high as Rs 14.50 per litre in mid-September to as low as Rs 3.50 per litre in May 2013 and is currently at Rs 9.90 per litre.

Assuming the current daily GUR level, total GUR for FY’14 could be around Rs 1,47,500 crore, according to Ind-Ra’s estimates.

“This could lead to the Government exceeding the budgeted Rs 65,000 crore of the total subsidy burden in FY’14,” the report said.

“To manage GURs, without enforcing a steep hike, the Government would possibly have to raise the upstream share of the subsidy burden and increase the GUR burden on oil marketing companies (OMCs),” the report added.

Ratings on OMCs

Despite increasing GUR, Ind Ra’s ratings on OMCs are likely to remain unchanged as they are based on the strategic importance of the sector to the sovereign.

“There is a strong likelihood of Government support if required, unless there is any perceived weakening of linkages, possibly due to a significant increase in the proportion of GUR they are forced to bear. The agency rates both Indian Oil Corporation Ltd and Hindustan Petroleum Corporation Ltd at ‘IND AAA’ with a stable outlook,” said the report.

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