He also said he would urge state governments to follow suit and cut sales tax or VAT by a similar amount.
The Centre earlier announced a Rs 2.50 per litre cut in petrol and diesel prices after it reduced excise duty by Rs 1.50 a litre and asked oil companies to absorb another Re 1.
"Ever since Modi government assumed power it raised excise duty on diesel by Rs 14 and petrol by Rs 9 per litre. So, a total of Rs 2.50 will be reduced on both diesel and petrol", said Jaitely.
The Finance Minister said, the prices of crude oil and domestic developments in the United States have impacted the economies across the world. Since petroleum prices have been de-regularised, increase in global crude prices result in an immediate increased in local prices.
"By asking the oil marketing companies to absorb the price hike, the government is giving a signal that it can interfere at anytime in a deregulated market in the larger public interest", said Gagan Dixit, a senior analyst with Elara Capital.More news: TS Kirk causes power outages, heavy flooding in Caribbean
Soon after the announcement, the NDA-led governments in Gujarat, Maharashtra, Chhattisgarh and Jharkhand followed the Centre's footsteps announcing a cut of Rs 2.50 per litre in fuel prices. If it is serious, it should reduce the tax to what it was when it assumed office.
BJP president Amit Shah congratulated all the BJP-ruled states for slashing the fuel prices. In Mumbai, petrol rates had breached Rs 90 per litre.
Brent crossed $86 per barrel and this is the highest in the last four years. The prices of petrol are maximum across the state, soaring above Rs 91 in many districts of the state.
"Last time it were only the NDA ruled states, which made the Value-Added Tax reductions after the Rs 2 excise cut by the Centre previous year", he said.
"The impact will be about Rs 21,000 crore for the full fiscal". Absorbing this Rs 10,500 crore in increased collection and maintaining fiscal deficit I am confident we will be able to do that.
"The government's move is positive as it will placate prices and inflation, said rating agency Care".