The announcement led to a healthy buying spree in oil and gas, public sector undertakings (PSUs), which includes all three state-owned OMCs and information technology (IT) stocks.
The BSE Sensex, which opened at 19,846.42 points, was at 19,951.28 points around 1.30 p.m. -- up 133.65 points or 0.67 percent from its previous close at 19,817.63 points.
The BSE Sensex touched an intra-day high of 19,959.64 points and a low of 19,783.41 points.
The BSE midcap index was up 7.87 points, while the smallcap index was marginally higher by 1.71 points.
The wider 50-scrip S&P CNX Nifty of the National Stock Exchange (NSE) was also trading flat -- down 36.55 points or 0.61 percent at 6,038.40 points.
Petroleum and Natural Gas Minister Veerappa Moily Thursday said the cabinet in a meeting decided to allow the OMCs to fix own diesel prices. The move is expected to lessen government's subsidies bill, thus rein in the fiscal deficit.
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Major indices like oil and gas, IT and public sector undertakings (PSU) were gainers, with oil and gas index being higher by 199.15 points, followed by IT index up 98.13 points and PSU index up 88.74 points.
In terms of losers, metals index was down 65.14 points, while the capital goods index was down 57.88 points and healthcare index was lower by 13.42 points.
Among other Asian markets, Japan's Nikkei was up 0.09 percent, Hong Kong's Hang Seng was lower by 0.07 percent and China's Shanghai Composite Index was lower by 1.06 percent.