Making the announcement following a cabinet meeting this evening, Union Finance Minister Arun Jaitley said, "Over the last 5 years, the (diesel) prices have increased (by) almost 50 paise every month because there is a reduction in the international crude prices while we are linking it to the market price. The price today would stand reduced."
In Delhi, the price of diesel is expected to go down by Rs 3.37 from midnight, Mr Jaitley said.
Deregulation means the prices of diesel will move as per market flow - just like petrol. It would also ease the government's huge subsidy burden.
This was the ideal time for deregulation as the global oil prices have been falling and in a first, retail sale of diesel has been bringing in profits for six consecutive weeks - currently it is Rs 3.56 per litre.
Recently, Raghuram Rajan, Governor of the Reserve Bank of India, had advised the Narendra Modi government to seize the moment and deregulate diesel prices.
The deregulation is a major reform move by the Modi government. But it is not risk-free.
Later, if the international oil prices start rising, the government would not be able to intervene, which could have a direct bearing on the price of essential commodities, as the transport sector mostly runs on diesel.
This is also why the diesel prices had so far been controlled and the Centre has been wary of upsetting the status quo.
Deregulation is expected to bring private firms such as Reliance Petroleum and Essar Oil to retail sales. Such companies do not receive government support for selling diesel at discounted rates and currently sell via state refiners despite having their own sales infrastructure.
Originally, petrol and diesel prices were deregulated in April 2002 when the NDA government led by Atal Bihari Vajpayee was in power.
But administered pricing regime made a backdoor entry in first quarter of 2004, towards the end of the NDA regime. Mani Shankar Aiyer, who was then the petroleum minister, decided to control diesel, LPG and kerosene prices.
The UPA government had decided to raise diesel rates in small monthly doses until pump prices were aligned with market rates and it could be deregulated. Since January 2013, the rates have cumulatively risen by Rs 11.81 per litre in 19 installments.