UPDATE 5-India cuts petrol, diesel prices as economy flags

(Updates with oil minister confirming fuel price cut)

By Himangshu Watts and Manoj Kumar

NEW DELHI, Dec 5 (Reuters) - India cut fuel prices for the first time in nearly two years on Friday after crude oil's fall of over $100 gave the government room to expand its planned economic stimulus package to lift sagging markets.

The 10 percent cut in gasoline prices and a near 6 percent decrease in diesel were announced by the oil minister, Murli Deora, ahead of an expected cut in short-term interest rates this weekend as New Delhi seeks to keep its economy growing.

The measures, well after Vietnam, Malaysia and Indonesia trimmed their own domestic prices, will also further reduce inflation that has fallen from a high of almost 13 percent in early August to just over 8 percent.

But lower prices will trim earnings for state-owned refiners like Indian Oil Corp and BPCL, which were just starting to enjoy profitability after years of mounting losses from selling heavily discounted fuel as crude prices surged.

"On the inflation point of view, yes this is positive, but it is going to hit the profitability of the oil companies," said Sachchidanand Shukla, economist at Enam Securities in Mumbai.

"They are now making profit of 12-14 rupees per litre for petrol and three rupees for diesel, which is going to be eroded."

The government regulates and partly subsidises prices of widely consumed fuels.

After the cuts announced by Deora, the price of petrol in New Delhi will be 45.6 rupees ($0.92), while diesel will cost 33.86 rupees a litre. Rates vary across the country depending on local taxes.

"It will give comfort to the government that wholesale price inflation by the end of the fiscal year (next March) will probably come off to 5 or 5.5 percent," said Sailesh Jha, senior regional economist at Barclays Capital, Singapore.

Trade Minister Kamal Nath said lower central bank rates and an interest subsidy on bank loans for exporters were expected to be included in the stimulus package to be unveiled on Saturday.

Analysts said the package would help the economy.

"It will definitely help in limiting the downside risks to growth and it is required at this juncture. You can't wait for the situation to worsen further," said D.K. Joshi, principal economist at domestic ratings agency CRISIL in Mumbai.

ELECTIONS