Diesel prices should immediately be raised by about 9.5%, a government panel recommended on Wednesday, along with other measures aimed at cutting the huge oil subsidy bill.
The panel, set up in May to advise the government on fuel pricing, also suggested capping the subsidy on diesel sales at 6 rupees a litre, oil minister S Veerappa Moily told a press conference.
The recommendations of the committee are not binding and need cabinet approval to be implemented. With state elections looming from November and a general election due by May 2014, the government may find it difficult to raise domestic fuel prices sharply.
India, the world's fourth-largest oil importer, needs to rein in subsidy spending to help stabilise its finances and support the rupee, which hit a record low earlier this year.
The diesel price hike could cut the government's fuel subsidy bill by as much as 160 billion rupees from November 1 to the end of the current fiscal year on March 31, 2014.
Diesel accounts for over 40% of refined fuel use in the country.