"A magisterial inquiry has been ordered by the government," A Delhi Government spokesperson said.
Officials said that the decision was taken after Vashishtha's family members met Chief Minster Arvind Kejriwal at his residence this evening and demanded a fair inquiry into the alleged encounter.
Vashishtha, who was wanted in several cases of fraud and other crimes, was hit by a bullet in the gunbattle with a team of Special Cell of Delhi Police last evening.
Vashishtha was taken to a nearby hospital where he was declared brought dead, the police officer said.
Vashishtha's wife Priyanka and brother Anil had earlier accused the police of staging a "fake encounter". They claimed that Vashishtha was not a hardened criminal.