After the minister's announcement, may states including Jharkhand, Gujarat and Chhattisgarh too announced a reduction in fuel prices.
He insisted that telling oil marketing companies to absorb Re 1 didn't imply going back on deregulation of prices.
Prime Minister Narendra Modi's ruling Bharatiya Janata Party is facing a tough election in three key states this year, followed by a national election which is due by May.
Responding to a query about state governments following suit with similar tax cuts, Jaitley said that this measure would be a "a test for all state governments, especially those whose leaders have been demanding cuts while paying lip service to people".
This is the second time in one year that the Centre has cut excise duty on petrol and diesel as rising prices pinch the common man. "Our OMCs will also absorb 1 rupee, resulting in an overall reduction of Rs 2.50 in prices of both petrol and diesel". "If the government wishes to stick to its glidepath of fiscal consolidation, then it will have to cut its expenditures significantly", said Rupa Rege Nitsure, chief economist at L&T Finance Holdings.
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"Reciprocating positively to FM's announcement, the Govt Of Gujarat has also made a decision to reduce Rs 2.50 on both petrol & diesel".
The minister also maintained that Thursday's decision did not represent a re-regulation of fuel prices.
Kerala Minister Thomas Isaac said the state would not reduce tax on fuel after Centre's announcement. In Kolkata and Chennai, petrol prices climbed by 15 paise to Rs 85.80 and Rs 87.33 per litre, respectively.
Jaitley said the move followed Brent crude oil touching four-year high of United States dollars 86 a barrel Wednesday and interest rates in USA reaching seven-year high. The centre levies a total of Rs 19.48 per litre of excise duty on petrol and Rs 15.33 per litre on diesel. On similar lines, Odisha finance minister Shashi Bhushan Behera said the state will not immediately reduce Value-Added Tax on fuel and will examine the Centre's request.
Jaitley, however, downplayed fiscal implications around the fuel price cut.
Reacting to the development, Karnataka chief minister H D Kumaraswamy said the Congress - JD (S)-ruled state has already cut fuel price by Rs 2 last month.