The effective reduction would be Rs 4.06 per litre.
Central Government has finally chose to stop the arrest of increasing Fuel Prices.
The decision was taken during a closed-door meeting between the Prime Minister Narendra Modi, Jaitley and petroleum minister Dharmendra Pradhan.
Experts believe that Rs 2.5 cut on fuel is nothing but a token relief. According to reports, Karnataka Chief Minister HD Kumaraswamy said that the state government will not reduce prices anymore since it has already announced a rate cut.
Over two-thirds of 61 economists said in a Reuters poll the RBI would lift the repo rate at least once by the end of 2018, with over half stating that there would be a 25 basis points rise in October.
Speaking at a press conference on Thursday, Finance Minister Arun Jaitley announced that the cut will be effected through slashing of excise duty to the tune of Rs 1.50 per litre, while the oil marketing companies (OMCs) will absorb the impact to the tune of Re 1 per litre.
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He also asked state governments to follow suit and cut taxes by a similar amount. In a post on Facebook, Mr Jaitley linked the weakening rupee and widening current account deficit or CAD to high global price of crude oil.
Following the Centre's announcement, BJP-ruled Maharashtra and Gujarat - which are among the highest taxing state, announced Rs 2.50 per litre reduction in the Value-Added Tax.
The cuts will cost the Centre Rs 10,500 crore in tax revenues, he said.
Global fuel prices, however, have been on the rise with the worldwide benchmark Brent crude nearing a four-year high of $86 per barrel earlier this week. A 13 percent depreciation in the Indian rupee had only made fuel imports costlier.
Union finance minister Arun Jaitley said that cut in fuel prices was a good economics as it will increase the purchasing power of consumer without hitting the fiscal deficit target. Any further revenue loss, however, could widen the fiscal deficit.