Prime Minister's Economic Advisory Council Chairman C Rangarajan on Thursday said, diesel prices may be freed from the government control by next fiscal.

The proposed move would lead to dismantling of the administered price mechanism.

It may be noted, the government on June 25, 2010, deregulated petrol price and said the same for diesel will be done soon.

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"I think it (deregulation of diesel prices) is likely to happen once inflation stablises at 6 per cent," he told reporters on the sidelines of the endowment lecture on former President R Venkataraman at the Madras School of Economics in Chennai on Thursday.

Rangarajan said, rising crude oil prices, mainly due to the political unrest in West Asia and North Africa, is a cause for concern for the government.

"If crude oil prices remain high for sometime, it will require some action on our part." Amid the crisis in Libya, any increase in fuel prices would become 'inevitable' if crude oil remains at $100 per barrel, "If crude oil prices remain above $100, it will be a cause for concern.

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"It will require some action on our part. Some adjustments in terms of raising the prices of petroleum products will become inevitable, he recently said in an event at Chennai.

Rangarajan said it would be appropriate to deregulate diesel prices when inflation reaches at around six per cent.

The wholesale price index-based inflation was at 8.23 per cent in January.

The government expects inflation to fall to 7 per cent by the end of March and has projected an average 5 per cent inflation in the fiscal year beginning April.

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An increase in diesel prices is crucial, as it accounts for about 40 per cent of the under-recoveries of oil marketing companies.

At the present levels, diesel is being sold at Rs 11 per litre below its cost.

During the present financial year, the under-recoveries of the public sector OMCs are expected to be around Rs 77,000 crore (Rs 770 billion) on account of the relentless rise in crude oil prices, according to reports.