Convinced that any amount of monetary measures will not be able to rein the galloping inflation, which has recorded a frightening two-year high of 6.73% (going by the latest figures), the Government today axed fuel prices. It slashed the petrol rates by a good Rs 2, while diesel will now cost Rs 1 less. The move is expected to unleash a chain reaction in the supply chain by cooling off prices of commodities.

Unlike monetary measures, the latest move by the Government is likely to have an immediate effect on price rise. To begin with, prices of agricultural commodities are likely to sober down as the transportation cost - a key component of overall price assessment factors, will come down.

It was in response to a sustained demand from the markets and analysts that the Government had to act on the supply side front to rein the rising inflation, instead of waiting for the RBI to take action. While it had taken a few measures in this direction last month, they did not seem to have been enough of a curbing mechanism.

The Petroleum Minster said the price cut burden will be met by a combination of new oil bonds and internal resource mobilisation by the oil companies. The Government has also said that it would cut down the duty on petro products to cushion the rising losses by the oil companies.

The government had been mulling over the unrelenting spike in inflation for the last few months. The latest salvo fired by the Government at taming inflation indicates that the Centre has realized that it is time to take action, especially when it is headed for assembly elections in a few states, including the politically important Uttar Pradesh.

The cumulative losses by the oil companies due to the price cut are estimated to be under Rs 50,000 crore. Gradual duty adjustment is in line with the Government’s policy.

However it is expected that there wont be much of a hit on the bottomlines of oil cos as most looses will be compensated by import duty cuts, pushing of fresh oil bonds.

According to Senior IOC official, the under-recoveries on diesel will go up from 1.35 to 2.35, while over-recoveries on petrol will be neutralised.