Losses on the sale of diesel have dropped to an all-time low of Rs 1.33 per litre, bringing the prospect of deregulation of the nation's most consumed fuel within sniffing distance.
If the current trend continues, diesel will be deregulated in three months.
An official statement said the difference between the cost of diesel production and the retail selling price has narrowed to Rs 1.33 per litre from Rs 2.49 last month.
This was made possible because of softening international oil rates and the new government continuing with monthly price increases.
Diesel prices were on Thursday hiked by 50 paise per litre.
Rates have cumulatively risen by Rs 11.24 per litre in 18 instalments since January 2013 when the previous United Progressive Alliance government had decided on small monthly hikes.
The government had in January 2013 decided to raise diesel prices in small doses of 40-50 paise per litre every month till the losses, which are made good through government subsidy, are completely eliminated.
Officials said the monthly increases had trimmed losses to less than Rs 3 per litre in May last year before a fall in rupee value led to losses on diesel sale widening to Rs 14.50 per litre in September 2013.
Since then, monthly increases have continued and the rupee has strengthened.
Losses on diesel stood at Rs 8.37 per litre in March.
When Modi government came to power in May, losses on diesel sales stood at Rs 4.41 a litre.
They fell to Rs 1.62 a litre in second half of June but doubled to Rs 3.40 in first fortnight of July.
The losses fell to Rs 2.49 in second half of last month.
Petrol price was deregulated in June 2010 and has moved more or less in tandem with the cost.
State-owned oil firms calculate the desired retail selling price of petrol and diesel on 1st and 16th of month, based on average international oil rates and foreign exchange value in the previous fortnight.
While petrol rates are revised accordingly, diesel prices are hiked on 1st of every month.
Besides diesel, the oil firms are losing Rs 32.98 a litre on kerosene and Rs 447.87 on LPG, the statement said.
"Oil Marketing Companies are now incurring combined daily under-recovery (revenue loss) of about Rs 226 crore on the sale of diesel, PDS kerosene and domestic LPG.
This is lower than Rs 261 crore (Rs 2.61 billion) daily under-recoveries during previous fortnight," it said.
The under-recoveries for the financial year 2014-15 are projected to be Rs 91,665 crore (Rs 916.65 billion) as opposed to Rs 1,39,869 crore (Rs 1,398.69 billion) in 2013-14.