The government’s decision last week to reduce fuel prices through a mix of state and centre tax cuts and price cuts taken by oil marketing companies (OMCs) may have far-flung impact on the domestic oil industry, according to a Moody’s report. The immediate impact, according to the rating agency’s note would be a credit negative for the OMCs.
Moody’s in its note raised concerns over increased borrowings for OMCs, rating downgrades, further directives to absorb fuel prices and pressure on upstream companies to increase in shareholder returns or subsidise crude oil prices.
On October 4, the government (Baa2 stable) reduced petrol and diesel retail selling prices by Rs 2.50 per litre, through cuts in excise duties by Rs 1.50 per litre and asking OMCs to absorb the remaining Re 1 per litre price cut.
“The government’s decision to reduce fuel prices is credit negative for the three rated OMCs – Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) – because they cannot fully pass on higher crude oil prices to consumers and their earnings will be negatively affected,” the note said. Read More
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