Jan. 5 (Bloomberg) -- India plans to free retail fuel prices from government control and link them to global crude oil, the prime minister’s top economic adviser said, indicating gasoline and diesel costs may be cut for the second time in a month.

“The more important thing is to link pricing to what is happening in the international markets, which means we will keep giving the benefit of lower prices to the consumers,” Montek Singh Ahluwalia, deputy head of India’s Planning Commission, told Bloomberg News in an interview in New Delhi.

India relies on imports for more than 75 percent of its energy needs and the government sets fuel prices to cushion the poor from inflation. Deregulating prices may help to cut revenue losses at Indian Oil Corp., the nation’s largest refiner, and its state-owned counterparts, which sell fuel below cost.

India cut gasoline and diesel prices from Dec. 6 after crude oil declined from a record $147.27 a barrel in New York in July and inflation cooled from a 16-year high. Oil fell 54 percent last year, the first annual drop since 2001.

“There would be a systemic shift and as and when the prices go up, local prices will also need to be adjusted,” Ahluwalia, who worked as an economist with the World Bank, said on Jan. 2. “We are pushing. That’s what the government should do and I hope the government will make an announcement to that regard soon.”

Crude oil for February delivery rose as much as 5.1 percent to $48.68 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $47.17 a barrel at 11:33 a.m. Singapore time.

Inflation in India eased to a 10-month low of 6.38 percent in the week to Dec. 20 from 12.91 percent in August. Declining commodity prices helped the Reserve Bank of India to slash interest rates.

Concern over shrinking profit prompted Standard & Poor’s to cut Indian Oil’s credit rating, citing declining cash flows caused by delays in government compensation for selling fuels below cost.

The rating downgrade came after the government gave 220 billion rupees ($4.5 billion) of bonds to refiners in December, with Indian Oil getting 120 billion rupees.

The Indian government is yet to decide on bonds to be given to state-run refiners as compensation for selling fuels below cost in the year to March, Oil Secretary R.S. Pandey said today.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

Last Updated: January 5, 2009 01:55 EST