The cut is a result of a reduction in the excise duty of 1.50 rupees per litre with oil marketing companies taking a revenue hit of 1 rupee per litre, he said.

Jaitley also asked state governments to cut the value added tax on fuel by a further 2.50 rupees per litre.

"I hope all state governments do this, and they announce this so that consumers benefit by 5 rupees," he told reporters.

The Nifty Energy Index fell 6.14 percent lower on Thursday in reaction to the news.

Shares in Indian Oil Corp, the country's biggest oil refiner, dropped 11.4 percent. Hindustan Petroleum Corp closed down 13.5 percent while Bharat Petroleum Corp Ltd fell 12.4 percent. Reliance Industries shares closed down 6.9 percent, their biggest single-day fall since Aug. 24, 2015.

Taxes on gasoline and diesel, which account for more than a third of retail fuel prices, are one of the biggest sources of income for the government, and a sensitive issue for voters.

Modi's ruling party is facing a tough election in three key states this year followed by a national election due by May.