Accordingly, diesel PV's share is expected to decline to 15-18 per cent in FY2022 from 29 per cent in FY2020.
"Within this, the share of diesel vehicles in the car segment will stabilize around 5-7 per cent (from 11 per cent) whereas UV segment's share will gradually reduce to sub 40 per cent (from 65 per cent) over the next 2-3 years," the report said.
"The entry-level segment (sub Rs 5 lakh price segment) has almost entirely shifted to petrol or CNG, as it doesn't make financial sense for an average car buyer to opt for diesel vehicle."
According to the report, one key challenge in this shift is the all important taxi segment which continues to account for a sizable share of overall diesel vehicle sales; and government's initiative to push clean vehicles (CNG or LPG or Hybrid) is yet to completely materialise.
"Here, the ratings agency expects that the CNG vehicles share will benefit at the expense of diesel share, as the CNG variant already provides lower running cost per km compared with diesel vehicles," the report said.
As per the report, there has been an increase in upfront price differential of Rs 50,000 to Rs 70,000 post BS6 implementation which along with narrowing fuel price gap is accelerating this shift.
"This apart, regulatory overhang like ban on older diesel vehicles and push for CNG in commercial taxi segment will dampen the demand for diesel vehicle in the medium to long term," the report said.
"The share of diesel vehicles has already reduced to 29 per cent in FY2020 from 58 per cent in FY2013, and it will further reduce to about 15- 18 per cent level in the next three years."
Besides, the report said the CNG vehicles will mainly benefit from the shift due to lower upfront cost and better cost economics than diesel vehicles.
"The share of CNG vehicles, currently below 5 per cent in overall PV sales, is expected to outperform other fuel segments in the medium term," the report said.
"In line with the emerging trend, OEMs are re-aligning their business strategy; some have exited from diesel powertrain offerings and are instead focusing only on hybrids or CNG."
Currently, the small car segment is largely petrol-driven whereas the UV segment is diesel-driven.
In the luxury segments, the sales mix is tilted towards diesel cars.
Globally, China, USA, EU, Japan and India are top 5 markets volume-wise.
"Interestingly, China and US, the world's top 2 automobile markets, have a negligible share of diesel vehicles in the overall car sales," the report said.
"However, diesel vehicles accounted for about 30 per cent and 29 per cent of new PVs sold in EU and Indian market during FY2019 and FY2020 respectively."