The government Saturday deregulated diesel prices by linking the fuel cost to market-based pricing.
The decision was taken by the union cabinet at a meeting held here.
While announcing the decision on diesel price deregulation Finance Minister Arun Jaitley said: "Price of diesel will be linked to the market, and therefore, depending on whatever is the cost involved, is the element that consumers will have to pay."
"Just like petrol prices, diesel cost will now be governed by market forces. The diesel prices were being increased by 50 paise or so over the last few months."
Petrol prices were deregulated in June 2010 but subsequent price revisions by the three state-run oil marketing companies (OMCs) have been done in a guarded manner so as not to stoke inflation.
According to Jaitley, the price of diesel will depend on the global crude oil costs and domestic demand.
"The prices should come down as the global crude oil prices have dropped substantially in recent times," Jaitley added.
Present at the conference where Jaitley was speaking, Indian Oil Corporation's Chairman B. Ashok announced that diesel prices will be cut by Rs.3.37 per litre including taxes from midnight Oct 18.
In September the government had announced that for the first time in the history of the regulation era on diesel, the under-recovery, or revenue loss, applicable on the fuel had been wiped out, and there is instead a profit on sales.
The OMCs were making an "over-recovery" by selling diesel at the current prices. This fuelled expectations of a rate cut for the first time in seven years.
The ending of under-recoveries caused by selling diesel below cost was made possible by the softening international oil rates and the monthly price increases.
With international crude oil prices dropping below the $100 a barrel-mark last month, petrol rates were cut thrice which resulted in a price difference with diesel that has fallen below Rs.10 a litre.
On Oct 16, the oil ministry reported an over-recovery (or profit) on diesel worth Rs.3.56 per litre.
The daily international crude oil price of Indian basket dropped nearly $4 a barrel (bbl) on Oct 16 at $83.85, against $87.46 on Oct 15.
Earlier, Reserve Bank of India (RBI) Governor Raghuram Rajan had advised the government to take advantage of low crude oil cost to deregulate diesel prices.
"Lower crude oil prices are helping consuming countries like us. We need to seize this moment to eliminate diesel subsidies completely," Rajan said while addressing a bankers' conference organised here by industry chamber Ficci.
Diesel prices have been raised monthly by 50 paise a litre in line with the government's January 2013 decision, while September was the first month that passed without a hike.
Rates have cumulatively risen by Rs.11.81 per litre in 19 instalments since January 2013.
Diesel currently costs Rs.58.97 in Delhi, Rs.67.26 in Mumbai, Rs.63.81 in Kolkata and Rs.62.92 in Chennai.
While the government was keen to pass on the benefit of cheaper oil to consumers, it couldn't free diesel prices because of the assembly elections, an oil ministry official had told IANS.
India Inc welcomed the move which is expected to curb government subsidies and allow more competition in the fuel retailing space.
"This is an extremely progressive move and underlines the commitment of the government to push further the agenda of reforms, growth and fiscal discipline," said Sidharth Birla, president, Federation of Indian Chambers of Commerce and Industry (Ficci).
"The decision has come at a time when global crude prices have been receding. In any case, the price of fuel products such as diesel should reflect the true market value and this would also encourage all users to economise on their diesel consumption and hence aligns with the objective of promoting environmentally sustainable growth,"
