New Delhi, Oct 18 (IANS) 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."

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 three state-run oil marketing companies (OMCs), were making an "over-recovery" of 35 paise a litre 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.

Diesel prices were earlier being 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.