"If taxes are cut, prices will decline significantly", Chidambaram said on Twitter.
But the Opposition launched a fresh offensive on the government over the hike in fuel prices.
Fuel rates have been on fire since mid-August, rising nearly every day due to a combination of a drop in rupee value and rise in crude oil rates.
On the other hand, according to a government release, the majority of fuel refineries in the country had failed to meet the production targets in the month of July.
In Mumbai, the petrol was being sold at Rs 86.56/litre, up by Rs 0.31/litre - the highest ever for any metro city.
The rupee-dollar exchange rate has dropped to an all-time low of Rs 71.42 to a dollar on August 31. The surge in fuel prices is due to spike in global crude prices and the depreciation of the rupee, reports said.
With expectations of further tightening in oil prices due to a mix of factors such as declining inventories in the USA, and Iran sanctions coming into place, the trend of rising petroleum prices is likely to continue. "OPEC (Organisation of the Petroleum Exporting Countries) had promised that it will raise production by one million barrels per day, which was not raised", he told reporters in Surat on Sunday. Besides, states levy a value-added tax (VAT), the lowest being in Andaman and Nicobar Islands where a 6% sales tax is charged on both the fuel.
However, the official said that reducing excise duty on fuel will massively widen the fiscal deficit.
Domestic credit rating agency Icra said in a report on Monday that global oil prices have risen by about 10 per cent over the past two weeks on declining inventories and faster than anticipated decline in Iranian exports as the countdown to the enforcement of United States sanctions begins.